The economy abounds with hopeful signs as the New Year arrives, enough that the Federal Reserve will begin to put its easy-money punch bowl on a higher shelf by trimming its bond purchases this month. But after five years of crisis, recession and an aren't-we-there-yet recovery, we don't fully trust the signs.
And that's why Mesirow Financial economist Diane Swonk sums up the outlook in a nutshell:
"2014 could be the breakout year,'' she says. "This is the year when we're going to find out.''
Find out what?
• Whether young adults who have put off forming households finally move out of Mom and Dad's, giving housing construction a needed boost.
• Whether the economy can really grow at an annual pace of 3% to 3.5%, generating 250,000 jobs a month and pushing unemployment to near 6% of the workforce, once freed of the drag from higher federal taxes and spending cuts that depressed 2012 and much of 2013.
• Whether the torpor of the last few years, in other words, was simply a bad hangover from an especially nasty, debt-fueled recession — or whether the economy has entered a sluggish New Normal, where 2% to 2.5% annual growth and a 7%-ish unemployment rate are as good as it gets.
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For the first time in years, forecasters got the U.S. economy basically right in 2013. The consensus outlook said the private economy would grow 3% or more, while a shrinking government would cut as much as 1.5 percentage points off growth, either directly or indirectly, leaving the overall economy growing 2% or so.
That's what has largely happened, at least until a fall surge in spending and hiring raised hopes before the final numbers are calculated.
November data were better-than-expected across the board, with hiring and retail sales beating forecasts and unemployment dropping to 7.0% for the first time in five years. And a big upward revision in data on the economy's third-quarter growth, announced Dec. 20, to 4.1%, suggests the push began sooner.
The optimism, as always, is qualified. The bull case depends on a sustained upturn in housing, as prices that are rising, if more slowly than in early 2013, spur significantly more construction to match the ongoing surge in auto sales. That's an especially big factor in the South, where half of new homes are built. But to get there requires better wage gains to support home payments and consumer confidence as interest rates rise to more normal levels — and those wage gains have only recently begun.
Here are four reasons to expect growth to pick up — and four more to worry that it won't.
1. The housing recovery seems real this time.
The top reason the recovery feels different this year is that housing is on more solid footing. The big question is, exactly how solid is it?
The biggest missing gap in the job market is that construction employment is down 1.9 million from 2007, including 1.4 million in home building and related categories. With total private-sector employment only about 700,000 below the peak — and manufacturing output back to setting all-time highs — the importance of housing is clear.
2014 forecasts for housing starts run from just under 1 million to as high as 1.35 million, up from about 950,000 in 2013. Moody's Analytics estimates each extra start is worth about 4.5 jobs, though rival consulting firm IHS says it's closer to three (Moody's includes more of the workers in ancillary industries, such as home-improvement stores). A housing market near the high end of forecasts could generate a million new jobs, pushing unemployment down by 0.7 of a percentage point or more.
2. State and local governments have healed.
One of the biggest changes in 2013 was that state and local governments went from firing people to hiring again, adding 127,000 workers through November on a base of about 19 million. That's because their spending turned slightly higher in the second and third quarter, the first two-quarter gain since the recession. Coming out of the last three recessions, state and local governments added 150,000 to 200,000 jobs a year, on a smaller base.
The state and local government recovery has room to grow more. Outgoing Fed Chairman Ben Bernanke pointed to one reason in his final press conference Dec. 18 — in the last three recessions or their immediate aftermath, government employment actually rose. This time, governments have shed about 1.1 million workers since 2010.
3. Falling energy prices and slower increases in health care costs are keeping inflation low.
The collapse in medical inflation since 2007, and the containment of total health spending it helps to enable, is one of the best things the economy has going for it. Medical inflation is at a 50-year low, with prices rising just 2.2% in the last 12 months. With the most important cost-containment measures in the Affordable Care Act just beginning to be implemented, it stands to stay low. That lessens a key cost pressure on businesses — and may free up more money to pay higher wages. Also, energy prices have fallen 4.8% in the last year, the government says, helping both household budgets and corporate income statements.
4. Washington has shut up — mostly.
Economist Joel Naroff's favorite political joke is that "the only thing we have to fear is Washington itself.'' And Washington's actions did cut growth nearly in half in 2013 by many estimates. But budget cuts coming this year are much smaller, shrunk even farther by the budget deal reached in December that reworked automatic spending cuts mandated by a 2011 law. Plus, no major tax increases are planned. Compared with 2013, less Washington drag on the economy could mean an additional percentage point or more in growth.
1. Washington is not that good — and we still have the debt ceiling.
Federal spending cuts will still shave a few tenths of a point off GDP growth this year — reducing the growth rate about 0.3 percentage points, Naroff said. The main risk from D.C. early in 2014 is that there may be another showdown over the debt ceiling. House Budget Committee Chairman Paul Ryan said Republicans want concessions for raising the borrowing limit before March — but haven't decided what.
2. Capital investment is low.
Growth in spending on business equipment, the category of investment most closely tied to boosting productivity, plunged to near zero by the third quarter from a double-digit pace in 2010 and 2011, helping to fuel a $2.2 trillion "investment gap,'' of money not spent since 2007, according to the Progressive Policy Institute. Next year, it's expected to grow just 3.1%, the Equipment Leasing & Finance Foundation says. That's versus double-digit percentage gains in 2010 and 2011.
This problem may evaporate by the second half of the year, especially if consumer spending sustains its recent pickup into early 2014, Goldman Sachs economist Jan Hatzius argues. Historically, capital spending has depended on consumer spending and credit availability — and both are improving, he says.
3. Interest rates will rise this year, which may slow the housing recovery.
As the Federal Reserve reduces and eventually ends its $85 billion of monthly bond purchases, mortgage rates are likely to rise — just as they did in the summer, when the Fed first hinted at the so-called "taper.'' In 2013, that blip caused momentum in the housing recovery to stall briefly.
With the average rate for 30-year mortgages now 4.48%, up from 4.1% in late October, and the National Association of Realtors projecting that they will rise another percentage point next year, it's too soon to know whether higher rates will slow the hoped-for construction boom. New-home sales and construction data from the fall suggest not. But it's a risk that bears watching.
4. Wage growth is still tepid, and a recent improvement is not well-established.
After a long decline, wages and personal income have turned higher in late 2013. The hope is that workers will get better raises as unemployment falls toward 6%. But the average gain in the last 12 months is just 2% — enough to offset the expiration of the payroll tax holiday last January, but no more than that.
If employers keep the upper hand in wage talks, that hurts consumer spending and home buying — and risks another year of sluggish growth. Goldman's Hatzius says consumer spending can sustain its recent gains with inflation-adjusted wage gains around 2%, because rising household wealth and an improving jobs market let consumers save less without taking a risk.
If wages rise faster, that would be the icing on the cake, Hatzius says. Higher wages and more plentiful jobs might also prove key to people forming more households, buying more homes, and even having more babies and spending more on diapers and clothes, Swonk said. The recession and its aftermath didn't just change how people shopped — it changed how they lived, she said. A lot depends on whether young people who have struggled to build careers and begin families amid the post-2008 mess move on with their lives, she says.
We'll find out beginning this week.
You may have heard that billionaires Sergey Brin, Mark Zuckerberg, Yuri Milner, and Jack Ma have sponsored something called the Breakthrough Prizes. These are $3 million awards handed out each year to people—generally world-class scientists—doing pioneering work in such fields as the life sciences, physics, and mathematics. The big money total is sort of a jab at the paltry $1 million Nobels, and the prizes themselves are meant to celebrate the sciences and drum up interest in solving the hardest problems. If you haven’t heard about the awards, that’s OK. You’re in the majority.
The big-name backers of these prizes tried on Thursday night to bring some added attention to their largesse. They held a star-studded awards ceremony event at the NASA facility in Mountain View, Calif. It was in many ways an odd choice, since the place suffers from drastic budget cuts and has had to fight, fight, and then fight some more to pursue its cutting-edge science. Nonetheless, folks such as Zuckerberg and Jack Dorsey showed up in their tuxedos, as did Rupert Murdoch, Conan O’Brien, and the evening’s host, Kevin Spacey. Brin kept it real by sporting a sweatshirt and a backpack.
The celebrities and business moguls gathered inside Hangar One. It’s one of the few landmarks in Silicon Valley—a massive structure that used to house dirigibles. Recently, Hangar One had its chemical-laced outer shell removed, so it’s now just a giant metal skeleton. This forced the producers of the awards ceremony to build a makeshift, plastic awards hall inside the Hangar. It ended up looking as if a tiny greenhouse full of penguins had been injected into the building. A guy who produces the Oscars dreamed this up, and French Laundry catered the event, so it had to be good, right?
I’d like to tell you more about the glamor and heavy discussions inside, and the palpable joy the attendees felt when they received their awards. But the press, also in tuxedos and best evening dresses, were cordoned off in a tent outside the glasshouse. They were allowed to leave briefly to go to the restroom—with the warning, “Don’t wander around”—and to sit on the floor and watch the proceedings on two small television screens. As awesome as this sounds, only a couple of the local technology reporters showed up to enjoy it.
The big news of the evening was the introduction of a Breakthrough Prize in mathematics. Starting next year, it will join a similar prize in physics and six prizes in life sciences. And, of course, there were this year’s winners.
- Michael B. Green, University of Cambridge, and John H. Schwarz, California Institute of Technology, for opening new perspectives on quantum gravity and the unification of forces.
- James Allison, MD Anderson Cancer Center, for the discovery of T-cell checkpoint blockade as effective cancer therapy.
- Mahlon DeLong, Emory University, for defining the interlocking circuits in the brain that malfunction in Parkinson’s disease. This scientific foundation underlies the circuit-based treatment of Parkinson’s disease by deep brain stimulation.
- Michael Hall, University of Basel, for the discovery of Target of Rapamycin (TOR) and its role in cell growth control.
- Robert Langer, David H. Koch Institute Professor at the Massachusetts Institute of Technology, for discoveries leading to the development of controlled drug-release systems and new biomaterials.
- Richard Lifton, Yale University and the Howard Hughes Medical Institute, for the discovery of genes and biochemical mechanisms that cause hypertension.
- Alexander Varshavsky, California Institute of Technology, for discovering critical molecular determinants and biological functions of intracellular protein degradation.
Risa Kumabe, 26, is a housewife in Tokyo who would like to return to work, but finds the cost of child care along with the amount of housework to be done standing in her way. In Japan, husbands with children spend on average about one-third the time helping with household duties than those in the United States.
Tokyo — Japanese Prime Minister Shinzo Abe has an unprecedented plan to boost economic growth and shore up his country's shrinking labor force — help more women return to work.
About two-thirds of Japanese women leave the workforce after the birth of their first child. Most do not return for years, if ever. It's a major reason the employment rate of Japanese women is one of the lowest in developed economies, particularly among those married and well-educated.
Abe's government wants to change that situation for women such as Saori Tachibana.
Drifting in a dead-end clerical job despite her college degree, Tachibana figured that, at 30, she had better buck up if she wanted financial independence. So, for 10 months, she juggled her full-time work with Saturday classes and studied day and night to become a certified labor consultant.
Her efforts paid off with a good job at a legal and accounting firm in Tokyo. But when she got married and became pregnant, her company pressured her to leave.
"They didn't say directly for me to quit," she said on a recent evening, sitting in a 700-square-foot apartment in Tokyo's Koto district that she shares with her husband, Shingo, and their 2-year-old son, Harushi.
"I told them that my husband was even planning to take a long child-care leave so I could keep working," she said, "but the company wasn't willing to let me stay."
That kind of outcome doesn't sit well with Abe's government, which won a convincing parliamentary election in July. It has pledged to raise Japan's labor participation of women to the world's highest level and is urging companies to promote women.
"It is essential for the 'power of women' — Japan's greatest potential, which had not been leveraged fully to date — to be fully utilized," according to Abe's growth plan.
The government's plan promotes maternity leave and would expand public child-care centers. Firms would get financial incentives to hire more women. In addition, some groups are trying to break ages-old cultural norms about women single-handedly raising children by portraying men who play the role of child caregiver as caped heroes.
Behind that drive is the country's acute need to expand its labor pool. READ MORE
Shinzo Abe is giving new hope to Japan’s unappreciated entrepreneurs
“IT BEGINS from now,” tweeted Takafumi Horie, the former boss of Livedoor, an internet firm, two months after emerging from prison this spring. Mr Horie is involved in no fewer than 30 new companies, including a space-tourism venture. If any of them grow to be big, Mr Horie, who was convicted of fraud in 2011, may show that a fallen Japanese entrepreneur can make a comeback.
The mood among Japan’s would-be business moguls is at its most buoyant since the dotcom bubble burst a decade or so ago. A higher stockmarket is boosting the chances of a successful initial public offering. The prime minister, Shinzo Abe, is Japan’s first leader to treat entrepreneurs as something more than greedy hustlers. For the past few years Mr Horie, a brash self-publicist, has been exhibit A in the case for holding that view. But now Mr Horie says he is being welcomed back into the business world.
Mr Abe’s three-part plan to revive the economy, known as “Abenomics”, is designed to help start-ups as well as big business. First came monetary loosening from the Bank of Japan, and a fiscal stimulus. The third part, a series of reforms to boost long-term growth rates, includes radical deregulation in new “special economic zones” spread across the country. If this pledge is honoured, many new opportunities could emerge for entrepreneurs in industries ranging from medical care to agriculture. The reforms also involve pressing the banks to stop demanding onerous personal guarantees when entrepreneurs seek loans for their businesses.
Most of all, Mr Abe admits, Japan needs to become more accepting of initial failure. As a second-time prime minister after a disastrous first term, he is himself a comeback kid. He reportedly described for guests at his home this summer how the young Walt Disney ran his business into the ground five times before he at last succeeded. Digital types were delighted when he attended a meeting of the Japan Association of New Economy, chaired by Hiroshi Mikitani, the founder of Rakuten, an online-commerce giant. Mr Mikitani has been brought in to advise the government on its deregulation efforts.
For now, Japan’s vital signs on entrepreneurship are dire. The overall number of firms is shrinking, and the rate at which new companies are born as a proportion of existing ones is less than half that in America and Britain. In 2012 the Global Entrepreneurship Monitor, a survey by a group of universities, put Japan in joint last place out of 24 developed nations for levels of entrepreneurial activity.
Japan’s record on fostering new firms is worse even than continental Europe’s. Just 6% of Japanese participants in the survey thought there were opportunities to start a business in their country, and only 9% believed they personally had the skills required. The equivalent figures for the French were 38% and 36%. Other Asians, in contrast, were bursting with optimism. That lack of ambition means venture-capital firms have few big payoffs to look forward to, with the result that there is a limited pool of cash available for those who do want to have a go at starting a business: a vicious circle that will be hard to break. Young Japanese firms attract around one-twentieth of the venture-capital money that start-ups in America pull in.
The outlook for creating new businesses could begin to improve if Mr Abe succeeds in leaning on the banks to stop demanding extensive debt guarantees. Now many would-be entrepreneurs, faced with the risk of losing their homes, give up before they start. In the short term the reform may make capital a little scarcer as banks tread cautiously. But in the long run it could transform Japan’s attitude to entrepreneurship, says Yoshito Hori, the founder of GLOBIS, a business school.
The industry ministry is promising to provide generous funding with the aim of doubling Japan’s rate of business start-ups by 2020. To do that it will have to add another 100,000 start-ups to the current annual tally. However, its record on picking winners is not great: its bureaucrats famously tried to stop the young Sony importing transistor technology and Honda from moving into cars. So the risk is that it ends up backing many duds, draining the public coffers to little benefit.
The mother-in-law factor
There are other reasons to be optimistic. The success of the big firms born in Japan’s great period of post-war entrepreneurialism later discouraged graduates from joining newer ventures. Experienced managers are seldom keen to leave large companies. Wives, mothers and mothers-in-law exert a strong influence on men not to join risky start-ups, says Yoshiaki Ishii, head of new-business policy at the industry ministry. But the perceived balance of risk is shifting. Many of the giants are struggling. The cost of starting a firm is plunging thanks to cloud computing and other innovations. Mr Horie says he is financing his new ventures through crowdfunding networks such as Campfire.
The government could help to remove plenty of other hurdles to entrepreneurship. One difficulty for science and technology start-ups is that large Japanese firms have signed up exclusive rights for the bulk of university discoveries. Small, disruptive firms are not usually able to access and develop them. And a widespread “not invented here” mindset stops established firms joining up with small ones to commercialise new ideas.
As a result many recent ventures—such as DeNA and GREE, two social-gaming operators—have been internet and software businesses that depend less on research, notes Daisuke Iwase, a founder of Lifenet, an online insurance firm. “There is too much talent chasing after smartphone apps and social gaming,” he says. So, some experts have recommended forcing large firms either to develop the discoveries to which they have the rights, or else to pass them on.
Japan’s entrepreneurs still feel vulnerable to sudden crackdowns, and fear they would be punished more harshly than big-business chiefs. Last year GREE unexpectedly found itself under investigation for possibly violating gambling laws. Its young, billionaire founder, Yoshikazu Tanaka, has since tried to ingratiate himself with the establishment: he now appears in a suit, not a T-shirt.
In all, much has to change before Japan becomes a kinder place for those trying to create businesses. There is a risk that Abenomics fails and brings about quite a different sort of rupture in the corporate climate, says Jeffrey Char, an entrepreneur and investor. If the central bank’s radical monetary loosening is not followed by thorough deregulation and strong growth, the result could be a sovereign-debt crisis (Japan’s debt stands at close to 250% of GDP). In such a crisis many of Japan’s biggest firms could collapse, says Mr Char: that would leave people with no choice but to start their own businesses. Boosting entrepreneurship through reforms would certainly be less painful.
The index of sentiment derived from a monthly Reuters survey of manufacturers rose by 3 points to plus 16 in August, which matched the level it was at in November 2010. A positive readings shows optimists outnumbered pessimists.
The index is expected to rise again to plus 18 in November in the Reuters survey, which is strongly correlated with a closely watched quarterly Bank of Japan tankan survey.
Makers of cars and electronics, however, were less upbeat due to worries about slowing growth in emerging markets, highlighting the risk overseas economies pose to Prime Minister Shinzo Abe's reflationary policies.
"Sales are doing much better than we initially anticipated," one chemicals maker said in the August 2-9 poll of 400 big and medium-sized firms, of which 276 responded.
The service sector gauge also rose 5 points in August from the previous month to plus 23. This marked the highest level since April 2007 due to a housing boom and increased corporate spending on IT services.
The index is expected to improve further to plus 29 in November.
The BOJ's tankan issued on July 1 showed manufacturers' sentiment turned positive in April-June for the first time in nearly two years and was seen rising further on the feel-good mood generated by Abe's policies, intended to end 15 years of deflation, spur hiring and improve wages.
The BOJ will release its next tankan survey on October 1.
The central bank kept monetary policy steady earlier this month and left its economic assessment unchanged as board members wanted more time to measure the strength of capital expenditure.
Comments from the Reuters Tankan survey in August suggest that a turnaround in business investment is still distant.
"Europe's economy is in the doldrums and domestically companies feel they still have excess capacity," said one machinery maker.
"Going through with new capital expenditure is much more difficult than we thought."
Japan's economic growth slowed more than expected in the second quarter, driven by an unexpected fall in capital expenditure in a worrying sign of companies' reluctance to invest.
Strong consumer spending, public works spending and a rebound in exports suggest that Japan's economic recovery can easily remain on track.
However, investor outflows from emerging markets due to worries about deteriorating growth could become a more of a concern for Japanese companies and policymakers.
(Editing by Eric Meijer)
A quick sniff of a nasal spray sends microscopic metal particles into the brain, where they target and destroy the damaging proteins of Alzheimer's disease. No Alzheimer's? No problem—the metal particles pass out of the body safely. Such is the promise of technology being developed by neuroscientist William Klein and nanotechnologist Vinayak Dravid of Northwestern University. The pair has invented a nanotech-based early-detection system that might one day deliver targeted treatments.
Klein and Dravid created an antibody—an immune molecule that detects specific chemical structures—that binds to a particle implicated in Alzheimer's. They linked the antibody to a nanoscale arrangement of iron oxide compounds, similar to rust, which can be seen with magnetic resonance imaging. The brain scan could detect the disease early on, so patients can start treatment sooner than they can today. “Once the chain reaction of negative events starts, it's like a lit fuse. You want to intervene as soon as possible,” Klein says.
Globs of beta-amyloid protein called plaques are a hallmark of Alzheimer's. But these days most neuroscientists agree that a tiny particle form of the same protein, called an oligomer, is the primary toxin in the illness. Eventually these smaller structures glom together to form plaques, but by then they have already damaged brain cells. The antibody created at Northwestern binds to the toxic oligomers and could one day deliver therapies to the brain or help clinicians evaluate how a patient is responding to a new medication.
So far the researchers have used the probe to distinguish between diseased and healthy human brain samples. The next step, slated for later this year, is to see if they can do the same in the brains of living mice. Already a nasal spray has successfully delivered the nanoparticles to a mouse's brain, most likely the same delivery method that would work for us humans.