U.S. economic News Week Ending November 12, 2010

U.S. bond markets were closed on Thursday in honor of Veterans Day. Stocks were mostly down for the week amid renewed concerns about European sovereign debt, especially that of Ireland and Portugal, and harsh criticism worldwide of the U.S. Federal Reserve Board’s latest injection of money into the economy.

Commodity prices soared this week, partly in reaction to the Fed’s stimulus plans and also on strong demand for raw materials from emerging markets. Gold prices continued their climb, reaching a new high of $1,410 per ounce, and copper prices also hit an all-time high.

U.S. economic news
Trade gap narrows more than expected
The U.S. trade gap fell 5.3% to $44 billion in September from $46.5 billion in August, according to the U.S. Department of Commerce. The trade deficit is $379.1 billion year to date, up 40% from the same period last year. U.S. exports were $154.1 billion in September, their highest level in over two years. Imports were $198.1 billion for the month. Exports were boosted by service-sector exports and a weak U.S. dollar.

New jobless claims drop to lowest level since July
The U.S. Department of Labor said that the number of first-time filers for unemployment benefits decreased 24,000 to 435,000 in the week ended November 6. The decline brings new jobless claims to their lowest level in four months. The better-than-expected weekly numbers follow last week’s optimistic jobs report, which said 151,000 workers were added to nonfarm payrolls in October.

Federal commission proposes $4 trillion in deficit cuts
The federal government’s 18-member fiscal commission released a preliminary report that recommends reducing the deficit by $4 trillion over the next 10 years. The report, which has drawn criticism from the political left and the right, calls for significant spending cuts beginning in 2012, including cuts in Social Security benefits, reductions in domestic and defense spending, and the elimination of popular tax breaks. The commission will make its formal recommendations to President Obama on December 1.

U.S. and global corporate news
Third-quarter earnings continued to climb, with nearly 75% of companies in the Standard & Poor’s 500 Stock Index reporting profits that are up significantly from a year ago.

General Motors contributed to the quarter’s overall positive earnings results by reporting a profit of $1.96 billion as revenue rose 20%. It was the automaker’s third-straight quarterly profit and its best quarter since 1999. The latest results were a marked turnaround from the $1.2 billion loss the company posted a year ago. GM’s earnings report was released ahead of next week’s planned initial public offering — the first time the company is selling shares to the public since it emerged from bankruptcy in July 2009.

Macy’s posted a profit of $10 million for the period ended October 30, compared with a prior-year loss of $35 million. The company has benefited from prior consolidations of its divisions, the introduction of several new brands, and a strategy to tailor its offerings to local markets. The turnaround for the department store operator could be a positive sign for retailers, as Macy’s typically kicks off the earnings season for major retailers and is seen by many analysts as a barometer of consumer spending.

Cisco Systems reported solid quarterly results but issued a weak sales forecast for the second straight quarter. The computer network equipment maker projected its revenue will increase by less than half of what analysts had projected for its November through January quarter. That disappointing outlook triggered a selloff in technology companies on Thursday.

Global economic news
Tensions high, expectations low as G-20 summit convenes
World leaders met for the Group of 20 Summit in Seoul, South Korea, this week to debate international trade imbalances and develop plans to support a global recovery. Major topics discussed during the two-day summit included currency manipulation, trade gaps, and protectionism. The United States faced a number of setbacks throughout the meetings as President Obama was unable to secure a bilateral free trade agreement with South Korea. The United States was also the target of severe criticism from a number of countries, including China, Japan, Russia, Germany, and the eurozone following the Fed’s controversial decision last week to buy $600 billion in U.S. Treasury securities over an eight-month period.

U.S. delegation faces roadblocks in Seoul, especially with China
The United States entered the trade gap discussions at a significant disadvantage. While the U.S. trade gap narrowed slightly to $44 billion in September, China announced a huge trade surplus, $27.2 billion in October, up a staggering 61% from September. The widening trade gap has only heightened tensions between the two countries. The United States was unsuccessful in pressuring China’s President Hu Jintao on the importance of currency revaluation, in part because of the Fed’s second round of quantitative easing. China believes the Fed’s latest move will lead to continued depreciation of the U.S. dollar and an eventual creditor crisis. As a result, the state-backed Dagong Global Credit Rating Co. on Tuesday downgraded its credit rating for the United States to “A+” from “AA.”

Leaders of the G-20 nations, despite failing to agree on definitive recovery steps, particularly on the U.S.-China currency dispute, outlined a number of macroeconomic policies and agreed to “refrain” from all-out currency warfare.

China inflation rate hits 25-month high
China’s inflation rate jumped to 4.4% in October, according to a Beijing statistics bureau report. The increase was due largely to a 10.1% increase in food prices. The increase exceeded the country’s official target rate of 3.0% and was a significant jump from September’s 3.6% rate. Although inflation has so far been restricted to food, price increases could spread as funds from Beijing’s economic stimulus measures and a surge in bank lending begin to impact the economy.