| ------------------------------------------------------------------------------------------------------------------------------------- Lifelines for the poor are disappearing  |
| Men wait in line to enter homeless shelter in Atlanta. |
NEW YORK (CNNMoney.com) -- With more people than ever living in poverty, the government's unprecedented effort to strengthen the safety net for needy Americans is running out.
Washington has spent tens of billions of dollars since the start of 2009 on programs to help feed the poor, house the homeless and support the unemployed. But much of this money has been used up or is about to expire in coming weeks and months.
A record 43.6 million people were in poverty in 2009, according to Census Bureau figures released Thursday. That's the most in 51 years of record keeping and equals 1 in 7 Americans. And the situation has likely become even worse this year, with the faltering economy and stubbornly high unemployment rate.
But it could have been even worse had it not been for the federal stimulus program. The Recovery Act kept more than six million Americans out of poverty last year, and reduced the severity of poverty for another 33 million people, according to the Center on Budget and Policy Priorities.
"It really makes a difference between getting to the end of the month or not," said Elizabeth Lower-Basch, senior policy analyst at the Center for Law and Social Policy, an advocacy group known as CLASP.
The $787 billion American Recovery and Reinvestment Act funneled money to a wide range of programs to help the needy. Some of these efforts were single infusions of cash, while others are set to run out soon. Only a few are continuing into 2011 or beyond.
Health care: The Recovery Act set aside $87 billion to assist states covering their soaring Medicaid costs, and Congress then added another $16.1 billion last month. This provision also prevented states from tightening eligibility and reducing benefits. (Number of insured drops for first time.)
Tax credits: The Recovery Act boosted the Earned Income Tax Credit and Child Tax Credit, which are estimated to cost a total of $19.5 billion, as well as put more money in the pockets of low-income workers with the Making Work Pay credit of $400 a person. These tax benefits end this year.
Needy children: The stimulus program also gave $2 billion for child care subsidies and another $2.1 billion for Head Start, an early learning program for needy children, both of which end after Sept. 30. And it provided $13 billion in Title 1 money for disadvantaged school kids, which can be used through mid-2011.
Homeless: The act provided $1.5 billion over three years to prevent homelessness and find places to live for those without a roof over their heads. It increased the maximum food stamps benefit by more than 13% for several years and also sent $150 million to the states for emergency food assistance in 2009.
Unemployed: The Recovery Act pushed back the deadline to apply for extended unemployment insurance, which are now set to run out at the end of November. Jobless benefits alone are credited with keeping 3.3 million people out of poverty last year, according to the Center on Budget and Policy Priorities.
One major stimulus program for the needy has only two more weeks left. The $5 billion boost to Temporary Assistance for Needy Families expires on Sept. 30.
The money, which is distributed to low-income households with children, can be used to provide cash grants, food programs, housing assistance and other aid. It also funds a subsidized jobs program.
Advocates are particularly concerned about the loss of this funding, which goes to pay the rent and put food on the table. The jobs program is expected to put more than 200,000 people back to work.
Another program that would terminate at month's end is the child care subsidy. Many of those beneficiaries would have to quit their jobs if they no longer get help paying for childcare, advocates said.
Looming on the horizon is another battle over the Nov. 30 deadline to extend federal unemployment benefits. Democrats have locked horns with Republicans several times this year before garnering just enough support to lengthen this safety net.
Unemployment benefits, which last a maximum of 99 weeks, have been critical to keeping people afloat during the Great Recession, said LaDonna Pavetti, director of welfare reform and income support at the Center on Budget and Policy Priorities.
With the economy still shaky and jobs hard to come by, all stimulus programs for the poor should be extended, Pavetti said.
"The need is still there," she said. "We will see greater poverty and greater need until the economy has picked up and people can find jobs on their own."
Washington has spent tens of billions of dollars since the start of 2009 on programs to help feed the poor, house the homeless and support the unemployed. But much of this money has been used up or is about to expire in coming weeks and months.
A record 43.6 million people were in poverty in 2009, according to Census Bureau figures released Thursday. That's the most in 51 years of record keeping and equals 1 in 7 Americans. And the situation has likely become even worse this year, with the faltering economy and stubbornly high unemployment rate.
But it could have been even worse had it not been for the federal stimulus program. The Recovery Act kept more than six million Americans out of poverty last year, and reduced the severity of poverty for another 33 million people, according to the Center on Budget and Policy Priorities.
"It really makes a difference between getting to the end of the month or not," said Elizabeth Lower-Basch, senior policy analyst at the Center for Law and Social Policy, an advocacy group known as CLASP.
The $787 billion American Recovery and Reinvestment Act funneled money to a wide range of programs to help the needy. Some of these efforts were single infusions of cash, while others are set to run out soon. Only a few are continuing into 2011 or beyond.
Health care: The Recovery Act set aside $87 billion to assist states covering their soaring Medicaid costs, and Congress then added another $16.1 billion last month. This provision also prevented states from tightening eligibility and reducing benefits. (Number of insured drops for first time.)
Tax credits: The Recovery Act boosted the Earned Income Tax Credit and Child Tax Credit, which are estimated to cost a total of $19.5 billion, as well as put more money in the pockets of low-income workers with the Making Work Pay credit of $400 a person. These tax benefits end this year.
Needy children: The stimulus program also gave $2 billion for child care subsidies and another $2.1 billion for Head Start, an early learning program for needy children, both of which end after Sept. 30. And it provided $13 billion in Title 1 money for disadvantaged school kids, which can be used through mid-2011.
Homeless: The act provided $1.5 billion over three years to prevent homelessness and find places to live for those without a roof over their heads. It increased the maximum food stamps benefit by more than 13% for several years and also sent $150 million to the states for emergency food assistance in 2009.
Unemployed: The Recovery Act pushed back the deadline to apply for extended unemployment insurance, which are now set to run out at the end of November. Jobless benefits alone are credited with keeping 3.3 million people out of poverty last year, according to the Center on Budget and Policy Priorities.
Running out of time
The money, which is distributed to low-income households with children, can be used to provide cash grants, food programs, housing assistance and other aid. It also funds a subsidized jobs program.
Advocates are particularly concerned about the loss of this funding, which goes to pay the rent and put food on the table. The jobs program is expected to put more than 200,000 people back to work.
Another program that would terminate at month's end is the child care subsidy. Many of those beneficiaries would have to quit their jobs if they no longer get help paying for childcare, advocates said.
Looming on the horizon is another battle over the Nov. 30 deadline to extend federal unemployment benefits. Democrats have locked horns with Republicans several times this year before garnering just enough support to lengthen this safety net.
Unemployment benefits, which last a maximum of 99 weeks, have been critical to keeping people afloat during the Great Recession, said LaDonna Pavetti, director of welfare reform and income support at the Center on Budget and Policy Priorities.
With the economy still shaky and jobs hard to come by, all stimulus programs for the poor should be extended, Pavetti said.
"The need is still there," she said. "We will see greater poverty and greater need until the economy has picked up and people can find jobs on their own."
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Lifelines for the poor are disappearing
Lifelines for the poor are disappearing
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Gov. Edward Rendell said Sunday he would provide $4.3 million to Harrisburg. This includes expedited payments of $1 million in fire protection and $2.6 million for an annual payment to the municipal pension assistance fund.
It also includes $850,000 to hire a financial management firm, Scott Balice Strategies, "to develop a comprehensive plan for the city's financial stability and a $500,000 loan "to be repaid when the city's financial situation improves," according to a press release from the governor.
Without this assistance, the cash-strapped city was in danger of defaulting on its $3.29 million payment to bondholders on Wednesday. The city had issued those bonds to build a trash plant.
In May, Moody's knocked the city's rating on its general-obligation bonds three notched down to "B2," five steps below investment grade
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Obama: Close tax loopholes to juice economy
Aid plan helps Pa. capital avoid default
NEW YORK (CNNMoney.com) -- The state of Pennsylvania is helping the beleaguered capital city of Harrisburg stave off default with a multi-million dollar cash injection, temporarily postponing the specter of bankruptcy.Gov. Edward Rendell said Sunday he would provide $4.3 million to Harrisburg. This includes expedited payments of $1 million in fire protection and $2.6 million for an annual payment to the municipal pension assistance fund.
It also includes $850,000 to hire a financial management firm, Scott Balice Strategies, "to develop a comprehensive plan for the city's financial stability and a $500,000 loan "to be repaid when the city's financial situation improves," according to a press release from the governor.
Without this assistance, the cash-strapped city was in danger of defaulting on its $3.29 million payment to bondholders on Wednesday. The city had issued those bonds to build a trash plant.
In May, Moody's knocked the city's rating on its general-obligation bonds three notched down to "B2," five steps below investment grade
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Obama: Close tax loopholes to juice economy
WASHINGTON (CNNMoney.com) -- As President Obama pushes a new campaign to juice up the economy, he's starting to fill in the details of how he would pay the estimated $180 billion tab. His plan: Eliminate some corporate tax breaks and subsidies, and close loopholes.
"For years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that," Obama said in his speech in Cleveland on Wednesday.
If Congress were to pass new economic recovery measures, it could pay for them by raising some $300 billion in new revenue by closing "tax loopholes," according to White House economist Jason Furman.
With Americans nearly as concerned about rising deficits as they are the lackluster economy, the president and lawmakers recognize that any new policy initiatives must be funded.
The White House has yet to specify exactly which corporate tax breaks would be on the chopping block, beyond saying that oil and gas companies will be first up. But Furman pointed to billions of dollars worth of tax loopholes that the administration has previously identified in budget proposals that Congress has yet to enact.
Here are two examples from the White House's proposed 2011 budget, as noted by Anne Mathias of Concept Capital's Washington Research Group:
* Limiting the amount of interest that can be deducted by U.S. subsidiaries of companies that have moved overseas. That could raise $1.7 billion.
* Repealing a manufacturing tax deduction that large global oil and gas firms get. That could raise $15 billion.
The problem is, many of these money-raisers have already been thrown on the table and presented to Congress, which hasn't done much with them. Also, every targeted tax break has a company behind it with a swarm of hired lobbyists poised to defend it.
Congress has already passed legislation to close some international tax loopholes, but White House officials still think there's more left to tackle. A 150-page report from the Treasury Department details the laundry list of tax changes the White House is pushing for.
Figuring out how to pay for the package will be key to congressional passage. Several Republicans -- plus one Democrat, Sen. Mary Landrieu of Louisiana -- have already come out swinging and said they don't want raise taxes on the oil and gas industry.
"While these tax increases may be politically popular in some areas of the country, they have a disproportionately negative effect on working families in the Gulf Coast where much of the industry is located," Landrieu spokesman Aaron Saunders said. "Sen. Landrieu fully supports getting America's economy back on track but feels that it should not be done at the expense of the Gulf Coast."
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"4 surprise bright spots in the economy"FORTUNE -- Good economic news has been hard to come by lately, but not all is doom and gloom in America these days. The end of summer ushered in a few signs of progress in some of the unlikeliest corners of the economy. They are no guarantee that the good times are around the corner, but they do provide a helpful reminder that this slow recovery is exactly that: a recovery.
Fortune highlights four bright spots, and assesses what kind of a lasting impact they might have on the economy.
Farming a recovery
Of all the industries impacted by the recession, U.S. agriculture remains relatively resilient as prices soar for everything from meats to grains, mostly on demand from markets overseas.
American farmers will export $107.5 billion in agricultural products this fiscal year that ends Sept. 30, the second highest ever after the 2008 record of $115.3 billion, The New York Times reported, citing federal estimates of farm trade and income.
Asia, and especially China, has driven much of U.S. agricultural exports. China is expected to surpass Mexico next year as the second-largest foreign buyer of American farm products after Canada.
Despite the increase, agriculture can only carry the U.S. so far since it makes up only a small fraction of the overall economy. And it's not as if farmers can bank on agriculture alone -- the Times notes that household income for many who live on farms comes mostly from off-farm jobs and other sources.
While it appears that agriculture alone probably won't be enough to sustain America's economic recovery, the surge will likely continue to last for a while as foreign markets, especially China, continue to demand products.
U.S. corporate buying frenzy
Last month was the busiest August on record for mergers and acquisitions volume worldwide, and the $286 billion worth of deals announced marked the highest monthly level since July 2008, according to Dealogic.
The activity was driven by companies in sectors ranging from technology to agriculture. This included BHP Billiton's (BHP) unsolicited $43.4 billion bid for Potash (POT), as well as Intel's $7.7 billion bid for McAfee (MFE). And Sanofi-Aventis' (SNY) $18.5 billion offer for Genzyme (GENZ, Fortune 500) on August 29 raised the total value of global hostile bids to date to $133.8 billion, a 26.6% increase over the previous year.
Global volume of mergers and acquisitions is at $1.8 trillion so far in 2010, up 24% from the previous year during the same time. One of the most interesting aspects about the peaked activity is that the value of deals in Europe and Asia rose this year, but the number of deals in each region was unchanged. The U.S. came in as the unlikely bright spot amid a fragile economic recovery. The value of M&A deals here increased only 5%, but unlike other regions, the number of deals was up 42%.
Many bankers are bullish on the potential for more deals ahead. While M&A activity often indicates a sign of strength in the market, some analysts caution that it's too early to declare a comeback, as highlighted by Fortune last week.
Detroit. Yes, that Detroit.
Detroit has long been known as the capital of the rustbelt, languishing from the troubled auto industry. But earlier this month, The New York Times suggested the city might be going through a re-birth as the auto industry significantly changed the way it did business following huge government bailouts of General Motors and Chrysler.
The Times called Detroit an "economic bright spot," highlighting a series of improvements at The Big Three: Ford Motor (F, Fortune 500), General Motors and Chrysler. It's true the companies have come a long way, but calling Detroit a bright spot amid a slowly recovering economy is probably somewhat of a stretch, at least for now.
Indeed, the industry has made huge strides. Ford churned more money in the first six months of this year than in the previous five years combined. GM, which received a $50 billion taxpayer bailout following its bankruptcy in June 2009, has filed for one of the biggest public stock offerings in U.S. history. And Chrysler is hiring new workers.
These are big turnarounds. Yet it remains to be seen how these companies will compete with foreign markets, mainly China (the world's largest auto market), Japan and Korea. The auto industries in these countries have proven to be more lean and efficient than their American counterparts.
The worst clearly isn't over yet -- GM announced last week that sales plummeted 25% in August. And it remains to be seen how long the lessons learned from GM and Chrysler's near collapse into bankruptcies will last with new leadership at the companies.
The bright spot is in the industry's changes. A remake of Detroit might follow. But whether or not the Big Three's momentum will last can only be told with time.
Manufacturing growth
American manufacturing has generally been in decline for decades, but the nation's factories have been key to the current economic recovery.
Many analysts predicted manufacturing would fall last month on signs that the global recovery would slow down later this year, but the opposite was true. U.S. manufacturing expanded faster than expected as factories added workers and raised production to restock inventory and respond to demands form markets overseas. The Institute for Supply Management's factory index rose to a three-month high of 56.3 from 55.5 in July. Most economists predicted it would fall to 52.8 or worse. A reading of more than 50 generally signals growth.
What's more, the surge in manufacturing has translated to jobs, though growth has been concentrated to mostly temporary employment, Tig Gilliam, Adecco CEO for North America told Fortune last week. Though the latest Labor Department report released last Friday suggested that manufacturing jobs fell more than expected in August, temporary jobs rose 17,000. And Caterpillar (CAT, Fortune 500), the Peoria, Illinois-based maker of construction and mining equipment, has announced it may add up to 9,000 workers globally this year.
Manufacturing, which accounts for about 11% of the U.S. economy, helped pull the nation out of the recession. For the U.S. recovery to continue, it will need to hold up.
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WASHINGTON (CNN) -- A new national poll released Sunday indicates that eight in 10 Americans say that the economy is in poor shape, and the number that say conditions are very poor is on the upswing after steady declines through the spring.
And according to a CNN/Opinion Research Corporation survey, more people blame the Republicans over the Democrats for the country's economic problems.
Eighty-one percent of the public rates the county's economic conditions as poor, with 18% describing the economy as good. Forty-four percent of people questioned describe economic conditions as very poor, up seven points from July.
The poll indicates that roughly half the country says that conditions have not improved in the past two years. The other half says that the economy has gotten better, but many of them expect things will get worse in the near future.
"Roughly a third of all Americans say that the economy has gotten better and will continue to do so," says CNN Polling Director Keating Holland. "But one in five say that things have gotten better but will take a turn for the worse in the months ahead -- essentially predicting the "double-dip" that many economists are worried about."
So which party gets the blame for the country's current economic problems?
According to the survey, more Americans hold the Republicans responsible than the Democrats, with 44% blaming the GOP and 35% picking the Democrats.
"And when George W. Bush's name is added to the mix, the number who blame the Republicans rises to 53%, with just a third saying that Barack Obama and his party are at fault. That indicates why the Democrats are likely to mention Bush's name every chance they get between now and election day," Holland said.
But according to numbers released Friday, just four in 10 Americans say they approve of the job President Barack Obama is doing on the economy.
The 40% who give Obama a thumbs up is a new low for the president on the economy in CNN polling.
The CNN/Opinon Research Corp. poll was conducted Wednesday and Thursday, with 1,024 adult Americans questioned by telephone. The survey's overall sampling error is plus or minus three percentage points.
-- CNN Deputy Political Director Paul Steinhauser contributed to this report.
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I have $10,000 and four months. Where do I invest?
(MONEY Magazine) -- Question: I have a budget of $10,000 for a stock simulation I'm doing for a business and personal-finance class. What stocks should I invest in to make the most money in four months? -- MattAnswer: I hope for the sake of you and your fellow students that this simulation represents some sort of academic exercise as opposed to your instructor's views on the right way to invest in the stock market.
I also think that focusing on such a short time period could make it more difficult to cultivate the patience you need to succeed as an investor.
But with those caveats in mind -- and assuming the $10,000 you're investing is theoretical money as opposed to real bucks -- I'm going to tell you what you should do to give yourself the best shot at making the most money within four months and beating your classmates in this exercise.
Actually, the advice I'm about to give is based on the experience of Moshe Milevsky, a finance professor at York University in Toronto. In addition to being an expert on risk management, an authority on retirement planning and a very entertaining speaker, Milevsky won the annual stock-picking contest run by Canada's Globe and Mail newspaper three years in a row earlier this decade.
The Globe's contest is a bit different than your simulation contestants pick only one stock and they're judged on their return over the course of a year as opposed to four months. But there's enough similarity that Milevsky's approach should be applicable.
So what, exactly, was his strategy?
He purposely avoided solid companies that could generate reliable gains over many years. Instead, he looked for stocks of companies that had the potential to zoom to outsize short-term gains and that would be less likely to follow the rest of the stock market (which means they'd be more likely to separate themselves from the picks of other contestants).
Specifically, Milevsky looked for stocks that had huge swings in their prices, as measured by standard deviation, and that were more likely to zig when other stocks zag. "The secret to winning -- if there is any secret -- is to pick a stock that is highly volatile and negatively correlated to the rest of the pack," according to Milevsky and a colleague in a technical paper.
And, in fact, Milevsky won the contest in 2004 with a stock featuring a 117.3% return. Canadian Superior Energy, a tiny oil and gas exploration and production company based in Calgary, had the qualities he was looking for in spades. It had a standard deviation of 102%, which makes it roughly five times as volatile as the Standard & Poor's 500 index, and it had a negative beta, which means it would be expected to move in the opposite direction of the market.
So if you want to apply Milevsky's strategy to your simulation, you should look for stocks with highly volatile share prices that don't march to the same tune as the market.
I don't know how many stocks you're required to buy in your simulation. But if your goal is to shoot for the highest possible return, you'll want to buy as few as possible. Why? Well, although diversifying is normally a good strategy for reducing risk, remember: in looking for the highest possible short-term return, you're standing conventional investing strategy on its head. So in this case, you don't want to diversify as doing so dilutes the effect of any big winners.
Now for the caveats. Even if you follow Milevsky's strategy, success is hardly assured. Far from it. In a technical appendix to his paper, he shows why the probability of winning using his system comes close to but can never exceed 50%. The best you can hope for is a near 50-50 shot at success.
And in those instances where you don't win, there's a good chance that the high volatility and low correlation may work against you. In other words, instead of racking up big gains, you may incur stomach-churning losses. Which is why Milevsky specifically warns that anyone "who attempts to replicate or mimic the behavior of the so-called contest winners with real money is likely to be disappointed."
Indeed, professor Milevsky and his co-author make it clear that they are in no way are they recommending that individuals adopt the techniques outlined in their paper as a an investing strategy: "Our main intellectual objective...is to illustrate the critical difference between a rational and prudent strategy for building wealth versus the optimal strategy for picking stocks in these all-or-nothing contests."
So if you want a better shot at beating your classmates in this exercise -- while recognizing that you may also end up bringing up the rear -- then you may want to give Milevsky's strategy a try.
But when you're looking to invest $10,000 of your own money in stocks, I suggest you simply plow the ten grand into a low-cost total stock market index fund or ETF like the ones listed on our MONEY 70. You may not have the highest return after four months, but you'll likely do better than most investors over the long haul.
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Family insurance costs skyrocket 14%
NEW YORK (CNNMoney.com) -- American workers are taking yet another blow to their wallets this year -- a whopping 14% jump in costs to insure their families.The spike comes even as premiums for family coverage rose only 3%. This discrepancy is a result of cost-conscious companies shifting more of the insurance burden onto employees.
Employees are paying about $4,000 to buy family insurance in 2010, $482 more than they did last year, the Kaiser Family Foundation said Thursday.
Companies still pay the bulk -- nearly $9,800 for a family of four -- but that was down a little from 2009.
The Kaiser survey was conducted between January and May 2010 and polled more than 3,000 employers nationwide.
Over the past five years, employees share of insurance premiums have risen 47%. That has outpaced a 27% jump in overall premiums and an 18% increase in wages, according to Kaiser.
Deborah Chollet, senior fellow and health economist with Washington-based Mathematica Policy Research, said the recession and a turbulent job market are key catalysts for rising insurance costs.
"Employers are struggling to keep their head above water. They're cutting costs just to maintain employment," Chollet said. "One way to do that is to make workers pay more."
In a strong job market a higher turnover rate actually helps companies contain increases in insurance costs, without having to increase workers' share of the expenses.
"New workers spend some time getting acclimated to their new jobs. They may not use their health benefits for a while," said Tracy Watts, senior health care consultant with leading benefits consulting firm Mercer.
In a down economy, the turnover rate is lower and existing employees tend to use their benefits more.
Another factor pushing up insurance costs is a trend whereby young employed adults forgo buying coverage as a way to save money, until they absolutely have to, she said.
This is a big risk for companies, because it can suddenly inflate their health care costs if there's an unexpected rise in the number of sick people buying insurance.
Health reform, Chollet said, may not offset all of the costs but it can help stabilize the overall market.
"The hope is that with reform, there's an increase in the number of insured people and this will help drive down the big increase," she said.
But others aren't so sure. They say employees could see even higher costs in their plans come open enrollment for 2011.
"Next year, the increases could be even bigger," said Gary Claxton, vice president with the Kaiser Family foundation. "We've heard stories about insurers asking for bigger employee contributions for next year's coverage."
Watts said she's not aware of any factor that could help drive down costs in the near term.
"Health reform mandates new levels of coverage that will increase employers' costs at least until 2014.," she said
For example, beginning next year, employers will have to provide coverage for dependents of employees till age 26.
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ISM manufacturing activity surges :
Economist Paul Ashworth of Capital Economics called the report "a rare piece of good news."
In a research note, Ashworth said he was "worried about an even bigger drop" than the predictions because regional manufacturing surveys showed "sharp deterioration" in August.
Economist Ian Shepherdson of High Frequency Economics was also worried about trends in the sector. In a research note, Shepherdson said the report was "a very big and pleasant surprise," but he warned the index has further to fall and investors should "enjoy this while it lasts."
Stocks got a boost after the report's release, with the Dow index (INDU) surging 230 points.
China's manufacturing sector also picked up in August, according to a pair of reports released earlier Wednesday, calming fears about the pace of that country's growth.
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Consumer spending picks up!!
NEW YORK (CNNMoney.com) -- Consumer spending rose in July, but Americans remain wary about the future of the economy.
Personal spending rose by $44.1 billion last month, or 0.4%, after falling less than 0.1% in June. This came in above the 0.3% increase economists expected.
"It's just a modest increase, which shows consumers are still cautious about spending decisions," said Anika Khan, economist at Wells Fargo.
She also noted the spending jump was linked to a rise in car sales, which could be "a seasonal quirk" because some auto plants stayed open in the summer.
Income and savings: Personal income edged up $30 billion, or 0.2%, last month, following a revised 0.1% decline in June, the Commerce Department said.
A consensus of economists polled by Briefing.com expected personal income to climb 0.2% in July.
Monday's report also showed consumers were saving less in July. Personal savings as a percentage of disposable income rose 5.9%, down from last month's downwardly revised 6.2% in June.
June 2010's savings rate was the highest since June 2009, when the reading came in at 6.7%.
"Even though the savings rate edged down over the month, it's still very high," Khan said.
Paul Dales, U.S. economist at Capital Economics, agreed the savings rate "remains high by the standards of the last 20 years."
Households are set on paying down their debt, which will help the economy in the medium term, Dales wrote in a research note. But that benefit will take time, and it will hurt near-term growth.
"Overall, the U.S. economy cannot rely on households to lift it out of its current funk," he said.
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Economy slowing to a crawl -- or a halt?
NEW YORK (CNNMoney.com) -- The economy is losing momentum. You know it. I know it. Federal Reserve chairman Ben Bernanke knows it.Now that we've gotten that out of the way, it's time to explore some important questions about the economy. How much is it slowing? And why is the recovery losing steam?
First, let's look at the economy's diminishing velocity. The government reported last month that the gross domestic product for the second quarter rose at a relatively tame annualized pace of 2.4%. That's down from 3.7% in the first quarter and 5.0% in the fourth quarter of last year.
But that 2.4% rate is probably giving the economy too much credit. On Friday morning, the government will release its first revision of GDP and economists surveyed by Briefing.com are forecasting that the growth rate will be lowered a full-percentage point to 1.4%. That's a drastic cut.
Ray Stone, chief economist with Stone & McCarthy Research Associates in Princeton, N.J., said that the main reason the economy appears even weaker now than just a month ago is that the manufacturing sector is losing ground.
A rebound in the manufacturing sector that started last year thanks to healthy foreign demand for U.S. goods helped to lift GDP in the latter half of 2009 and the first quarter of this year.
But Stone said it looks like the increase in inventories during the second quarter of 2010 is slower than first thought, which would be a drag on GDP. In addition, the trade deficit in June rose to $49.9 billion as exports slipped. That figure had not yet been reported when the first estimate for second-quarter GDP was released.
For that reason, Stone estimates that GDP in the second quarter was only up a 1.1% annualized pace.
"Exports were much weaker than predicted. Activity has slowed. It looks like the recovery that began in the middle of 2009 has lost momentum since then and the economy is just barely staying in positive territory now," Stone said.
What's even more troubling about the export slowdown is that the manufacturing sector had been one of the few pockets of strength in the job market lately. According to the government, the sector has added 183,000 jobs since December 2009.
"The manufacturing sector has been the driver in the recovery, but that growth has stalled. That's unfortunate because ultimately, manufacturing has been a growth engine for employment," said Bruce Yandle, an adjunct professor of economics at Mercatus Center at George Mason University in Arlington, Va.
There may be a very small glimmer of hope in the second-quarter GDP report though. If businesses are slowing the pace of their inventory buildup in the face of waning export demand, that could, in theory, lead to stronger growth in the third quarter and fourth quarter if companies ramp up again ahead of the crucial holiday shopping season.
But that may be asking a lot from consumers. Many have reined in their spending already and it's reasonable to think they will continue to do so as long as the housing market remains weak and unemployment stays high.
"In terms of where the economy heads from here, it's all about the consumer," said Rob Lutts, chief investment officer at Cabot Money Management Salem, Mass. "It's going to be a gradual, grinding, frustrating recovery. It won't be horribly bad but it's not going to be as good as people want."
What's more, the terrible housing sales numbers for July reported this week could very well put a damper on GDP in the third quarter.
"You can't reasonably expect much contribution to growth from the housing market this year or next year," said Yandle.
So is there anything the Federal Reserve can do to get the economy back on track? It's already pledged to buy more long-term Treasury bonds to keep rates low.
Some are hoping that Bernanke will give more details about an economic rescue plan when he speaks at a Kansas City Fed conference in Jackson Hole, Wyoming Friday morning after the GDP number comes out.
But it's unlikely Bernanke will do anything more than state the obvious or he risks further spooking an already nervous market.
"It's a subpar recovery and we're too close to zero growth. It looks like the economy can't stand on its own two feet," said Linda Duessel, equity market strategist with Federated Investors in Pittsburgh. "But Bernanke is going to stick to his message and probably say that we're seeing a weakening economy and that the Fed is there to do what it can."
- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, La Monica does not own positions in any individual stocks.
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More Dems back tax breaks for the rich
WASHINGTON (CNNMoney.com) -- A wave of weak economic reports has prompted some Democrats to embrace a short-term extension of the Bush tax cuts -- even for the rich.
President Obama has been campaigning to extend the tax cuts for the middle class, while allowing the tax breaks for individuals who earn more than $200,000 a year and families who earn more than $250,000 to lapse.
However, the Senate Democrats don't have the 60 votes needed to beat back a filibuster and pass Obama's tax plan, a Senate Democratic aide confirmed. Sen. Ben Nelson, D-Neb., Sen., Kent Conrad, D-N.D. and Sen. Joe Lieberman, a Connecticut Independent who caucuses with Democrats, have all recently said that raising taxes -- even for the rich -- doesn't make sense while the economy is faltering.
They all say they'd favor some kind of temporary extension of the Bush tax cuts -- for a year or possibly 18 months -- including for those in the top income bracket.
Friday topped off a week of economic bad news, including plunging home sales and a downward revision in the Gross Domestic Product numbers.
These reports are prompting more Democrats to call for all sorts of tax cuts, including those that benefit the wealthy.
Rep. Harry E. Mitchell, D-Ariz., said in a letter sent Friday to House Speaker Nancy Pelosi that he wants to make the Bush era tax cuts on capital gains and estate taxes permanent.
"With today's news that the nation's gross domestic product expanded at only a 1.6 percent annual rate for the second quarter, I once again urge you to allow a vote on the extension of key tax cuts that are about to expire," Mitchell wrote.
The Bush tax cuts are particularly controversial. Republicans passed the tax cuts back in 2001 and 2003 and they're set to expire at the end of this year.
Under the White House plan, the top two tax rates would revert to where they were in the late 1990s: The 35% rate would go to 39.6% and the 33% rate would go to 36%. The highest-income filers would also see their tax rates on capital gains and dividends go up.
Making tax cuts permanent just for families making less than $250,000 would cost estimated $2.2 trillion over 10 years. Extending tax cuts for everyone costs $3 trillion over 10 years.
Rep. Chris Van Hollen, D-Md., who runs the Democratic Congressional Campaign Committee, said Friday that House Democrats have secured votes needed to pass the Obama-proposed plan of limiting tax cuts for middle class families.
But, Van Hollen acknowledged that the onslaught of bad economic news has given some Democrats pause about allowing the tax cuts to expire for those in the top income bracket.
"Obviously you have a variation of opinion in the Democratic Caucus," Van Hollen said. "There are obviously different variations (of tax breaks) that are possible; but anything you do has got to get out of the Senate."
And that's why the House wants the Senate to go first on the Bush tax cuts. The House has spent the last two years watching the Senate struggle with stalemates over other high profile Obama policy priorities, including health care reform, Wall Street reform and small business lending assistance, all of which passed more easily and quickly in the House.
The Senate returns from recess the week of Sept. 13. But Senate leaders have been "discussing all options," because they lack the votes to pass the Obama plan on tax cuts as planned, Senate Democratic aides confirm.
Senate Budget Chairman Kent Conrad, D-N.D., a fierce deficit hawk, said last month that he would be reluctant to let anyone's tax cuts expire just yet.
"In a perfect world, I would not be cutting spending or raising taxes for the next 18 months to two years" Conrad said. "This downturn is still very much with us unfortunately."
- CNN Political Producer Peter Hamby and CNNMoney's Jeanne Sahadi contributed to this report.
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American job creation 101: stop fretting over Chinese investment
FORTUNE -- Last week, eight senators rallied a call to scrutinize one of China's biggest telecommunications equipment manufacturers, Huawei Technologies. Company executives are bidding to sell equipment to Sprint Nextel (S, Fortune 500) in the United States, but in an Aug. 18 letter to top Obama administration officials, senators asked for a deeper look into the deal in the name of national security.Citing media reports, a press release from the Chinese Embassy in Iran and other documents, senators expressed concerns over claims that Huawei had sold equipment to Saddam Hussein's regime, had a close business relationship with the Islamic Revolutionary Guard in Iran and had ties with the People's Liberation Army in China.
This isn't the first time lawmakers have given Huawei a very public grilling. In 2007, Bain Capital Partners' announced a joint venture with Huawei to acquire 3Com. A deal never went through as the companies withdrew the bid following national security concerns.
It is perfectly appropriate for the U.S. government to evaluate the flow of foreign investments through its Committee on Foreign Investments. In the past, the committee has rarely come up with negative findings and the majority of investments typically move forward, says Ken Lieberthal, director of Brookings Institution's John L. Thornton China Center. Lieberthal wonders if some lawmakers have chosen to add unnecessary publicity to the review process that could end up scaring off Chinese investors from putting their money into the U.S.
We've seen this movie before. In 2005, China National Offshore Oil Corporation, one of the country's three major state-owned oil companies, faced fierce opposition from US lawmakers when it made a bid to take over U.S.-based Unocal Corporation. CNOOC withdrew plans amid a political firestorm fanned by national security concerns.
"That was a searing experience for the Chinese side," Lieberthal says. "This created the impression that Chinese capital was not welcome in the U.S."
Nevertheless, Chinese investments into the U.S. economy have jumped steadily in recent years, although not quite as high as the peaked level Japan saw in 1991. In 2009, Chinese companies announced new direct investments in the U.S. of nearly $5 billion as reported in Fortune's May cover story. This is a marked increase for China, which during previous years averaged about $500 million annually.
It's anybody's guess how Huawei's latest investment plans could pan out. The national security issues lawmakers including Senator Jon Kyl of Arizona and Christopher Bond of Missouri have raised deserve a solid review. However, it's also clear that the tone of their concerns needs to change if the U.S. will attract investments from the country that now has world's second largest economy. China must see investing in America as a worthwhile business venture -- not a risk-filled project that will all too likely make embarrassing headlines. Perhaps it's time we do the same.
The senators Fortune contacted could not be reached for comment on the letter. But we had several points to bring up with them about seeing Chinese investment in a different light:
1) America needs jobs
With unemployment hovering at an uncomfortable 9.5% and an economy facing lackluster growth, Chinese investments have the potential to create thousands of new jobs. Take for instance China's Anshan Iron and Steel Group Corp. The company wants to buy a small stake in a $175 million rebar facility under construction by a U.S. start-up called, Steel Development Co. in Armory, Mississippi.
But a group of 50 U.S. lawmakers have called for an investigation into the deal, saying that it threatened U.S. jobs and national security. Steel Development Co. has defended the Chinese investment and pointed that it could create about 1,000 construction jobs and more than 200 permanent manufacturing jobs once the facility is done.
Not all public officials have discouraged Chinese investments, however. State governments, including those in South Carolina and Texas, have made concerted efforts to attract Chinese investments that create factories and jobs.
"The combination of successful Chinese investments in Minnesota, South Carolina, North Carolina, Kentucky, and elsewhere combined with the global recession, have made Americans generally receptive to Chinese investments that creates jobs, as long as investors abide by U.S. law and practice and are not seeking acquisitions in military sensitive areas," says David M Lampton, China studies director at Johns Hopkins University.
2) It's (properly) already hard for China to do business in the U.S.
While Chinese firms see the U.S. as an attractive place to do business, executives also think it's an incredibly risky venture.
Chinese companies that decide to move or expand into the American marketplace know that the business environment is more mature but also highly legalistic, with stacks more regulation on everything from labor regulations to workplace safety.
Adjusting to a new regulatory environment is hard enough. Expecting Chinese companies to deal with elected officials making a political case out their dealmaking creates an unnecessary barrier to doing business.
Indeed, China's marketplace has all sorts of quirks that give the country an unfair advantage over other economies, including an artificially low renminbi. Evening that out, the political storm that erupts when a Chinese company wants to invest in the U.S. is almost comparable to an unofficial tariff.
3) A measured stance would give the U.S. more negotiating power and improve diplomacy
The interest that Chinese companies have shown in investing money in America could suddenly give officials on Capitol Hill more leverage when it comes to negotiating trade issues and economic policies with its East Asian neighbor, China expert Dan Rosen told Fortune in May.
The U.S. already depends a lot on China for everything from clothing to electronics. Even amid the world's economic uncertainties, exports from China to the U.S. in July rose 38.1% to $145.5 billion, widening the trade surplus with the U.S. by 46% to $28.7 billion. And though China has cut its holdings on U.S. Treasury notes and bonds recently, it's still America's largest creditor next to Japan. As of July, China held 10% of the $8.18 trillion in publicly traded U.S. debt.
At the same time, China has huge stakes in the U.S., as it overwhelmingly depends on U.S. demand to drive its export-led growth. Encouraging Chinese investment could only help America's negotiating powers by giving China an even larger interest in the US economy. It might just give U.S. lawmakers that extra edge to smooth issues (from human rights to tariffs) between East and West.
"I lived in Ohio in the 1970s and 1980s, when Japanese automakers were investing in what we then called the rust belt -- that investment not only created employment that was welcome, but it also helped diffuse trade tensions with Japan," Lampton says. "The Chinese are taking a page from the Japanese playbook."
4) It doesn't matter. Regulators will do what's best
It's pointless for U.S. lawmakers to make huge public stinks over national security concerns. While these are valid issues that need to be thoroughly addressed, they are mostly a sideshow. U.S. regulations will ultimately dictate how Chinese companies behave in our markets. And more importantly, they will decide whether these companies have the bona fides to operate in the U.S.
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Economic indicators: Hot or not?
But the recent turmoil has changed the way some economists look at their favorite indicators. Data that was seen as prescient a few years ago is all but considered a failure today. Some indicators that were once wallflowers are now in the spotlight.
Since uncertainty seems to reign these days, perhaps it's not surprising that other major indicators, such as consumer confidence and stock market prices, have no clear consensus.
After taking an unscientific poll of economists and other soothsayers, Fortune has devised an official (for now, anyway) "Hot or Not" list of economic indicators, along with a couple that will always remain classics. Hello, ISM Manufacturing Index, and so long housing data!
Hot:
The Institute of Supply Management's manufacturing index is everybody's current darling. "It's a very good series, one of the best out there," says Bernard Baumohl, chief global economist for The Economic Outlook Group. The survey quizzes manufacturers on new orders, production, employment, and inventories, among other topics. Andrew Busch, global currency and public policy strategist for BMO Capital Markets, says the index has "a very nice record for predicting growth and employment." The ISM numbers are compiled monthly, making them relatively timely. Released on the first business day of the next month, they don't have time to get stale.
And what's the ISM telling us now? The May index fell to 59.7% from 60.4% in April, but that was still considered good news. Many economists were expecting a reading of 59%, and any number over 50% shows that more firms are expanding than contracting.
Credit spreads are also very much in vogue. Even those who don't think financial market indicators tell us much about the overall economy keep a close eye on them, if only because they're worried that the next blowup will come from the financial sector. Busch looks at the spread -- or difference -- between three-month LIBOR and overnight index swaps. On June 1, it stood at about 31.325 basis points, about even with last week's level and up from about 10 basis points before the Greek credit crisis. That number, Busch says, shows how much players in the capital markets are willing to trust each other. "If the spread starts to climb, you've got continued risk that counterparties are fearful of transacting with each other," he says.
Employment data, say many economists, is in some ways the most important. But employment numbers are subject to maddening revisions, making "any nonfarm payroll data of any single month totally ridiculous," says Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation. Economists say the revisions are the worst right around inflection points -- right when accurate data could potentially be most useful. The solution is to try to find a trend based on the past six months of data.
April's data showed 290,000 jobs created, and analysts expect May's numbers to come in at about 500,000, building on an improving trend.
Anything released weekly. For all the respect accorded measures such as gross domestic product and indexes of leading economic indicators, economists complain that by the time they're released, they don't contain much that's new. "The markets move so instantaneously that you can't wait for the GDP or the monthly jobless numbers to come out," says Busch. "You have to anticipate it."
That's where weekly numbers come in: jobless claims, weekly same-store sales and mortgage applications among them. As with employment data, a single report is of limited use, so economists typically look at 4- to 8-week moving averages of those 'weekly' numbers.
Not Hot:
Raw Commodity Prices. One of the series that failed miserably in the last cycle was raw industrial commodities prices, says Robert J. Barbera, managing director and chief economist at ITG. At one time, the prices of commodities actually reflected demand for that particular good. More recently, says Barbera, "it became stylish in a great many pension funds not to own oil companies but to own oil." The demand among investors buoyed commodities prices even as demand from those who actually needed the products was fading. "In the first half of 2008 many economists were saying, 'This can't be a recession, commodities prices are still strong,'" Barbera says. "In fact we were six months into a recession."
Two Journal of Commerce commodities indexes fell sharply in May, leading some remaining believers in this indicator to see bearish times ahead.
Housing data. Once burned, twice shy. In 2007, housing was "the quintessential indicator of where we would be going," says Keith Hembre, chief economist and investment strategist at FAF Advisors, which advises the First American family of funds. Then housing indicators such as sales levels, building levels, and permits all continued to climb without the job and wage gains that were supposed to propel them. Strong housing indicators didn't mean a strong economy; they pointed to a bubble. (In April, sales of previously-owned U.S. homes rose to a five-month high) Now when economists talk about housing numbers, they're more likely to be looking at weekly mortgage applications.
Classics:
GDP is "the mother of all economic indicators in the U.S." says Baumohl, for the simple reason that it pretty much encompasses everything else. But by the time it's released, a lot of its revelations are no longer new, greatly diminishing its predictive value. Still, the GDP is so revered, says Lakshman Achuthan, managing director at the Economic Cycle Research Institute, that it allows "someone who sees a little bit of GDP growth inside a recession to take a policy position that is 100% wrong" -- such as raising interest rates. First quarter GDP rose at an annualized rate of 3%, compared with 5.6% in the last quarter of 2009.
The yield curve is "the mac daddy of economic indicators" says Ritholtz, who says he was astonished when, in 2007, an inverted yield curve wasn't widely taken as a sign that the U.S. was headed for a recession. Hembre says that instead, many thought rates on long-term Treasurys were being kept artificially low because of purchases by the Chinese central bank. "The yield curve is a no-brainer," Ritholtz says. "Ignore it at your own risk." Now, he says, the yield curve is steep, which is consistent with the fact that the financial sector has had a good run
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Stocks lose big on home sales shock
The Dow Jones industrial average (INDU) sank 134 points, or 1.3%, the S&P 500 (SPX) lost 15 points, or 1.5%, and the Nasdaq (COMP) composite fell 36 points, or 1.7%.
"Economic reports have been close to disastrous," said Joseph Saluzzi, co-head of equity trading at Themis Trading. "People are very concerned about the economy and everyone is talking about a double-dip [recession] at this point."
Disappointing economic news has sent investors flocking to the perceived safety of Treasurys and the Japanese yen, which hit a 15-year high against the dollar early Tuesday.
Losers outnumbered winners by three to one on the New York Stock Exchange and the Nasdaq.
Declines were led by tech, finance and health care stocks, with General Electric (GE, Fortune 500) and Sony (SNE) sliding more than 2%, Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) dropping more than 1% and Pfizer (PFE, Fortune 500) slipping 2%. Among the biggest losers, Medtronic (MDT, Fortune 500) shares sank 11% after the medical device maker booked disappointing quarterly earnings and lowered its full-year outlook.
Wall Street struggled through another choppy session Monday, with stocks finishing lower as ongoing worries about the global economy pushed excitement about deal-making talks to the backburner.
Economy: The National Association of Realtors said existing home sales plummeted 27% last month to an annual rate of 3.83 million units, marking the lowest sales pace since the association began tracking the figure in 1999. Economists surveyed by Briefing.com forecast a rate of 4.72 million units.
"This number coming in lower than even the most bearish expectations just confirms the same deteriorating economic conditions we've been seeing," said Ryan Detrick, a senior technical strategist at Schaeffer's Investment Research. "The economy seems to be very quickly slowing down and not showing signs of life."
A report on new home sales is due Wednesday, and economists surveyed by Briefing.com expect a slight increase to an annual rate of 334,000 units in July from 330,000 in June.
Meanwhile, a report released Tuesday showed that disagreements among the 17 key Federal Reserve officials about how to handle the economy peaked at a meeting earlier this month, according to The Wall Street Journal.
Currencies, bonds and commodities: The dollar fell to a 15-year low against the Japanese yen in early trading, slipped against the euro, but climbed against the British pound.
"The yen is extremely strong, giving people real concern about our economy," said Saluzzi. "And with the 10-year yield this low, it shows people are really willing to put their money into Treasurys. All of this together means the risk trade is definitely off."
The yield on the benchmark 10-year note approached a 17-month low Tuesday, falling to 2.50% from 2.6% late Monday.
Treasury yields have been holding near historic lows recently as economic jitters have boosted the appeal of so-called "safe" investments such as government-backed debt.
In other markets, oil futures for October delivery fell $1.47 to settle at $71.63 a barrel. Gold for December delivery added $4.90, settling at $1,233.40 an ounce.
World markets: European shares finished sharply lower. The CAC 40 in France dropped 1.7%, Britain's FTSE 100 lost 1.5% and the DAX in Germany fell 1.3%.
Asian markets ended mixed. Japan's benchmark Nikkei index ended down 1.3% and the Hang Seng in Hong Kong fell 1.1%. But the Shanghai Composite edged up 0.4%.
Companies: Barnes & Noble (BKS, Fortune 500), which put itself up for sale earlier this month, posted a quarterly loss that widely missed expectations and said same-store sales fell in the first quarter.
Shares of the bookseller ended more than 2% lower.
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State tax hikes could go too far
NEW YORK (CNNMoney.com) -- Some U.S. states facing steep budget gaps have resorted to tax policies that could be harmful over the long term, a non-profit research group said Monday.In a review of 2010 changes in state tax policy, the Tax Foundation said certain states have targeted tax increases on high-income earners, smokers and out-of-state business transactions. These taxes may be politically convenient, but the foundation said that relying too heavily on such sources can lead to problems over the long run.
"Relatively high taxes on high-income individuals, smokers and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate," said Joseph Henchman, director of state projects at the Tax Foundation.
The tax increases come as states across the nation struggle to recover from the Great Recession. State tax revenues have been depleted by the weak economy and demand for social services has risen as unemployment remains high.
According the National Conference of State Legislatures, 33 states project budget gaps for fiscal year 2012, and 23 states for fiscal year 2013.
But the Tax Foundation said some states have resorted to targeted taxes and accounting "gimmicks" to paper over budget shortfalls and avoid any significant cuts in spending. This approach is irresponsible, the group says, because it assumes the economy will recover quickly.
"When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability," said Henchman.
In Oregon, voters approved a measure to temporarily increase income taxes to 10.8% on income over $125,000, and 11% on income over $250,000. This so-called "millionaires' tax" could force high-income earners to leave Oregon, which will eventually hurt the state economy, the Tax Foundation said.
However, other states have eliminated or lowered taxes on top earners.
New Jersey Gov. Chris Christie vetoed a bill in June to renew the state's "millionaires' tax." In addition, Rhode Island passed a tax reform law that would, among other things, lower the top income tax rate to 5.99% from 9.9% in 2011.
Meanwhile, the review said that five states have increased cigarette taxes so far in this year. That compares with a total of 18 states in 2009.
Hawaii, New Mexico, New York, South Carolina and Utah have all recently raised state taxes on tobacco.
Washington has levied a tax on carbonated soft drinks, but New York and the District of Columbia decided against doing so, according to the review. Mississippi is looking into a tax on the syrup used to sweeten carbonated soft drinks. Colorado recently removed sugared beve
rages and candy from the list of groceries that were exempt from sales tax.
In addition to targeted taxes, the report said some states have raised overall sales tax rates this year.
Arizona voters approved a three-year increase on sales tax to 6.6% from 5.6%. Kansas increases sales taxes to 6.3% from 5.3%. However, Arkansas cut sales taxes on groceries to 2% from 3%.
The review also took issue with a new sales tax regulations in Colorado aimed at online retailers. According to the Tax Foundation, out-of-state retailers such as Amazon have already terminated affiliate relationships within the state and some have launched a legal battle to challenge the law
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'Bush-ama' tax cuts: The $2.2 trillion decision :
NEW YORK (CNNMoney.com) -- They're often called the "Bush" tax cuts. But at this point they might as well be called the Bush-ama tax cuts.
That's because President Obama has embraced the tax relief measures introduced in 2001 and 2003, proposing they be extended indefinitely for most Americans. If lawmakers do nothing, the measures expire Dec. 31.
The tax cuts lowered income and investment tax rates, boosted the child credit, reduced the estate tax, and narrowed inequalities affecting married taxpayers.
Another reason for the new Bush-ama moniker: Like President Bush, President Obama has not called on Congress to pay for the cost of the tax cuts. In fact, the extension of the cuts is exempt from the new "pay-go" rules that Obama signed into law recently.
Extending the tax cuts for most Americans will increase the federal deficit by an estimated $2.2 trillion over 10 years.
Deficit hawks are uber-frustrated.
"Why do you spend over $2 trillion in your budget -- the most you spend on any single policy item -- on your predecessor's tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation's fiscal outlook?" Diane Rogers, chief economist for the Concord Coalition, wrote in her blog Economistmom.com.
In a nod to deficit reduction, Obama did propose that lawmakers let the tax cuts expire for high-income households, couples making more than $250,000. Doing so would reduce the deficit by $678 billion from where it would be if the cuts were extended for everyone.
But recently, while he didn't say so explicitly, Obama seemed open to rethinking his campaign promise not to raise taxes on the middle-class. In an interview last month, he said he would weigh recommendations from the bipartisan fiscal commission he created to suggest ways to put the U.S. fiscal house in order.
"We should be able to solve this problem without putting a burden on middle class families," he told CNBC. "Having said that, I'm also going to wait for the fiscal commission to provide me [with] their best recommendations. ... At a certain point, what we've got to do is match up money going out and money coming in."
The next 7 months.
The commission won't report its recommendations until Dec. 1. In the meantime, it's not clear when Congress will take up the issue of the 2001/2003 tax cuts. One theory is that they'll vote to extend them before their August recess to score political points before the midterm elections in November."It would look ugly to go home and campaign for five weeks without having done something for the middle class," said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.
On the other hand, the legislative agenda is already fairly packed.
Anne Mathias, director of research at Concept Capital's Washington Research Group, is in the camp that believes Congress may not address the issue until December.
It's also not clear yet how long lawmakers might opt to extend the tax cuts. There had been a push by both parties to make them permanent. But some believe extending them for a year or two may be the smartest move given current political and economic constraints.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, proposes that lawmakers extend the tax cuts to the end of 2012, and then use the prospect of making them permanent as a "sweetener" to draw votes for a serious deficit-reduction deal. No deal, no tax cuts.
"This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer ... . Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible," MacGuineas wrote in a blog post.
No matter how long the tax cuts are extended, no one should bank on low rates forever, Stretch cautioned. The country's long-term fiscal condition is too precarious for that.
"No matter what happens, Americans' taxes are going up one way or another. The middle class is going to have to be called on to help reduce the deficit. There's not enough fiscal capacity if we just tax the top 3%," Stretch said.
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Five 'new normals' that really will stick
FORTUNE -- Whenever we go through a major change in our culture, it seems we have to adjust to 'the new normal.' And today is no exception -- as the U.S. economy struggles to recover from the financial crisis, Americans are being forced to reckon with more 'new normals' than we'd like.
Of course, we adapted to 'new normals' long before the phrase became cliché. According to a Factiva search, one of the earliest references came in a Newsday article in 1988, in which 'the new normal' referred to the realities of single parent households and the need for more government-funded childcare. After September 11, 2001, the 'new normal' referred to the vulnerability of a nation changed.
Today it's everywhere. A search for the phrase on the New York Times web site yielded 11 results in just the past five days.
It's not easy to change Americans' financial habits permanently, and 'new normals' don't always last. Fortune found five that just might stick, at least for a while.
Long-term unemployment
With the jobless rate standing stubbornly close to 10%, it's tough not to wonder if high unemployment could be a long-term fixture of the American economy. With little to no hiring in the private sector, it almost seems like the only new jobs out there are -- well, devoting the day to finding a job. The Obama administration has been speaking out against joblessness as the 'new normal,' saying the problem is cyclical.
Economists predict that unemployment will drop to 8.7% by end of next year, and by 2013, it will fall to 6.8%. Even if the predictions pan out, that's no easy target. A University of Maryland business professor this month told The New York Times that the economy would have to add 300,000 more workers a month over the next three years to get the jobless rate to fall to the administration's 2013 target. Earlier this year, when the economy made a brief comeback by growing at a healthy 3%, it added fewer than 100,000 jobs a month. When the jobless rate will return to pre-recession levels of about 4.6% (as it was January 2007) remains to be seen.
Renting over owning
Buying a home may never be the promising investment it was before the crisis hit. Gone are the days of looking at a lovely Cape Cod and seeing an instant piggy bank.
Between 2006 and 2009, home prices fell more than 32%, according to the S&P/Case-Shiller Home Price Index. And just when it looks like the gravely weak housing market is beginning to stabilize, we hear more bad news. In its latest monthly report released July 27, Case-Shiller warned that a broader look at home prices over the past year haven't shown sustained recovery, even though the index surprisingly bumped 5% compared with May 2009.
Meanwhile, it appears keeping up with the Jones' no longer means having a mortgage. The idea of renting is okay, and in many cases, preferred. Between 2004 and 2009, the number of renter households rose nearly 10% or by 3.4 million, according to a 2010 study of the Joint Center for Housing Studies of Harvard University. The rise of the renting class might be here to stay.
Saving over spending
If paying down debt and saving more is the 'new normal,' this might not be such a bad thing, at least in the long-term. Americans overspent for too long, and that's largely what got us into this financial mess.
In June, credit card balances fell by $4.5 billion, or 6%, according to the Federal Reserve, marking the 21st consecutive month of declining balances. Meanwhile, personal savings have risen to 6.4% of after-tax incomes, about three times higher than it was in 2007.
Of course, all this saving isn't exactly helping our economy in the near term. But if we're more responsible spenders after we emerge from this economic malaise, we'll save ourselves some more pain in the future.
Staycations over vacations
With high unemployment and a preference for saving more as possible mainstays of the U.S. economy, more of us are also likely to vacation closer to home. Though some consumers are expected to travel more this summer than last year, when the staycation officially became a trend, many are driving instead of flying and they're also spending less on whatever trips they do take.
But more are opting to stay home entirely. In a USA Today/Gallup Poll released in May, 27% say they plan to travel less this summer than last, compared with 18% who say they'll travel more. More than one-third do not see much change in their travel plans.
Higher taxes for 'the rich'
Depending on whether or not President Obama has his way, the nation's top earners (what some might call 'richest') could see higher taxes as the 'new normal.' In an effort to reverse the huge tax breaks enacted under the George W. Bush administration, Obama's plan would mean people making more than $195,550 in taxable income and joint filers with taxable income of more than $237,300 would be pushed up into higher tax brackets, from the current 33% and 35% brackets to 36% and 36.9% brackets next year.
While some argue this could further hamper an already weak economy, others say this new normal could also help reduce the country's huge budget deficit. Perhaps this new normal isn't so much about higher costs for the so-called rich but rather an equalization of the nation's tax structure.
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Unemployment rates rise in 14 states
NEW YORK (CNNMoney.com) -- State unemployment took a negative turn in July, with more states posting rising jobless rates than in the previous month.A total of 18 states and the District of Columbia posted unemployment rate decreases in July, according to the Labor Department's monthly report on state unemployment. Jobless rates rose in 14 states and were unchanged in 18 states.
The report was slightly gloomier than in June, when unemployment rates eased in more than half of all U.S. states for a third straight month and only five states reported jobless rate increases.
But at the same time, fewer states reported jobless rates of 10% or higher in July. While 17 states and D.C. reported rates at or above this level in June, only 11 states posted rates of 10% or higher in July.
Nevada posted a record high rate of 14.3%, making it the state with the highest level of unemployment for a third month in a row, after it took the distinction from Michigan in May.
But Michigan wasn't far behind, posting a 13.1% rate in July, followed by California, which posted a 12.3% rate.
North Dakota remained the state with the lowest unemployment, posting a 3.6% rate, followed by South Dakota and Nebraska, with rates of 4.4% and 4.7%, respectively.
Compared with the same period a year ago, the employment picture was a bit more encouraging, with more than half of the nation's states reporting lower unemployment. Twenty-seven states and D.C. posted rate declines from the previous year, while 20 states reported increases and three states had no change.
In a separate report earlier this month, the Labor Department said the economy continued to lose jobs in July, with employers cutting payrolls by 131,000. Meanwhile, the national unemployment rate remained unchanged at 9.5%.
The state unemployment report issued Friday showed that 25 states reported jobless rates significantly lower than the national unemployment rate, while seven states had higher rates.
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A bitterly divided Congress, fanned by the White House
FORTUNE -- "This committee doesn't function well on a partisan basis, and in the 22 months that I've been chairman of it we've never acted that way." That was Senate Banking Committee Chairman Chris Dodd speaking in December of 2008, when American voters had the audacity to believe a new President's promise to rise above the short-sightedness of partisan Washington and unite most Americans around solving big problems.
Flash forward to August 2010, and the retiring Democratic senator from Connecticut has changed his tune, telling Washington Post columnist E. J. Dionne that working across the aisle is vastly overrated. "There's nothing wrong with partisanship," Dodd proclaims, noting that in the early decades of the republic, Congress was "a brawl."
Dodd presided over his own brawl this summer when he squeezed a massive financial reform bill through the Senate without the backing of a single Republican member in his committee. Of all the failures at bipartisanship -- the $862 billion stimulus package and the $940 billion healthcare reform chief among them -- the new "Dodd-Frank Wall Street Reform and Consumer Protection Act" stands as the most egregious.
Why? Because it squandered a rare moment in Washington, one in which broad outlines of agreement had already emerged from serious-minded lawmakers negotiating in good faith. Because senators were acting the way American voters -- who repeatedly tell pollsters they are disgusted with Congress -- expect their elected officials to act. Because a full year of hard bipartisan work fell prey to election-year politics.
New law, same troubled economy
With Dodd-Frank (named also for House Banking Committee chair Barney Frank) now signed into law, Washington moves into a ritual so familiar it's like comfort food: government regulators drafting more than 200 rules, law firms auditioning to show prospective clients that they can maneuver the new rules, business pages guessing at likely candidates to oversee it all.
But on Capitol Hill, the experience added a new layer of bitterness and distrust that will haunt Congress when it returns after Labor Day to stare down a deep, dark well of troubles -- jarringly high unemployment, a mounting debt that threatens the nation's fiscal solvency, immigration fears creating emotion-charged divisions.
Sadly, that wasn't Dodd's original intention. Senators on both sides of the aisle tell me the banking committee chairman was determined to bring both sides together. (A spokesman said Dodd was not available to comment for this column.) "Left to his own druthers, Chris Dodd would have produced a really good bill that would have been bipartisan," says New Hampshire Senator Judd Gregg, a Republican.
Last winter -- as the poisonous divide over healthcare engulfed Washington -- Senate banking committee members, at Dodd's direction, were meeting in pairs to hash out major portions of a complex bill aimed at preventing a repeat of the 2008 financial crisis. Republican Bob Corker was paired with fellow businessman Mark Warner, Democrat of Virginia, to hammer out a way to prevent massive financial firms from holding the economy hostage -- commonly known as the "too big to fail" conundrum. Gregg and Democrat Jack Reed were tasked with addressing derivatives; ranking GOP member Richard Shelby and Dodd were working on consumer protection provisions, and so on. "We realized these issues don't break down on a left-right continuum," Warner says.
Senators and their staffs, who had already worked across party lines in dozens of formal and informal hearings, were meeting around the clock. There was a certainty among the senators that their efforts would not end in the brawl that healthcare had become. Everyone agreed that the laws governing the nation's financial sector needed reform. "The banking committee is the one place where I actually feel like a senator," says Corker, "where we talk about substance, and not in a partisan way."
So, what happened? In March, the Obama administration began to smell a better election-year opportunity. "We were so far down the road when, out of nowhere, the President and his people decided to make this a political exercise," charges Gregg. "The White House was getting pummeled on their programs, especially healthcare, and they needed a bad guy, so central casting sent them Wall Street. The bill got caught up in pandering populism."
The White House role
That's a Republican charge. But Democrats privately acknowledge that White House pressure played a role in the ultimate decision by Dodd to pick off just enough Republicans to get the bill through the chamber -- rather than seek broad bipartisan agreement. According to a detailed account in the Washington Post, President Obama met with Dodd in mid-March, told him that GOP ranks were fraying and suggested he pick off votes from the same tiny handful of Republicans who had supported healthcare and the stimulus.
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