Got alcohol? Gov. Brown legalizes flavor-infused drinks

Aficionados of cocktails infused with fruit, vegetable or spice flavors won a political victory when Gov. Jerry Brown signed into law a bill making them legal.

Although the Prohibition-era restriction on the practice of flavoring vodka, gin and other distilled alcoholic beverages with flavors had largely been ignored, proponents of the bill argued that the old law needed to be changed.

State Department of Alcoholic Beverage Control regulators argued that bartenders who infused the flavors into the spirits violated state statutes designed to keep the three functions of the liquor industry -- distilling, distributing  and serving -- separate.

The updating of the law was sought by a coalition of business and tourist industry groups including the Golden Gate Restaurant Assn., the California Chamber of Commerce, the Family Wine Makers of California and the California Restaurant Assn.

"I'm pleased that the governor has recognized the need to update an unnecessary regulation that has prevented businesses across California from making infused beverages available to their customers," the bill's author, state Sen. Mark Leno (D-San Francisco), said Wednesday.

"In San Francisco and other cities where tourism is critical to the local economy, restaurant owners have been asked to stop serving infused cocktails in the name of an outdated law written decades ago."

The bill sailed through the state Legislature without receiving a dissenting vote.

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Gin cocktails make a splashy comeback

Cool Summer cocktails

-- Marc Lifsher

Photo: Ricardo DeAratanha / Los Angeles Times

California wine grape harvest shows signs of shortage

There are times in agriculture when too little crop can mean a good thing for farmers and food producers but discouraging news for consumers.

This is where California’s wine industry is now, according to a recent report by researchers at UC Davis’ Graduate School of Management.

After California’s wine industry struggled to deal with a glut of grapes in 2003-04, a number of vineyards and growers went out of business because they had too much of a good thing. Now there are signs of a shortage of wine grapes.

Blame it on the weather, say researchers. Last spring northern California vineyards struggled through hard rain and a freeze. That, in turn, meant that the weather wasn’t conducive for the plants to get a good start on growing this season's grapes.

Now, as harvest begins, farmers are finding that the grapes are coming in a bit light, said Robert Smiley, director of wine studies at UC Davis.

“Depending on who’s counting and which varietal you’re talking about, you’re seeing [the crop] short about 20% to 30% statewide,” said Smiley, dean and professor of management, emeritus, at Davis’ graduate school of management.

“Going forward, that means consumers will likely see fewer wine discounts” on California wines because of the shortage in the crop, Smiley said. “If you don’t have enough product to meet demand, why cut price? You’re going to see the industry’s pricing tighten up.”

-- P.J. Huffstutter

Photo: Wine stockpiles at a Costco warehouse. Credit: Spencer Weiner / Los Angeles Times

Bass Pro accused of racist hiring practices in lawsuit

Nationwide sporting goods retailer Bass Pro Outdoor World made a racist habit of not hiring black and Hispanic applicants, according to a lawsuit filed Wednesday by the Equal Employment Opportunity Commission.

The complaint alleges that managers regularly used derogatory names and that some in Texas, Louisiana and elsewhere said hiring black candidates “didn’t fit the corporate profile,” according to the suit.

The company also retaliated against employees who complained about the hiring practices, sometimes firing them or forcing them to resign, according to the allegations. Managers also destroyed internal hiring records, according to the suit, which was filed in Texas court.

Bass Pro has discriminated against minority applicants since at least 2005, denying qualified people positions as cashiers, sales associates and managers, according to the complaint. The company has about 60 stores across the U.S. and Canada, including two in California.

The EEOC is seeking a permanent injunction prohibiting Bass Pro from future discrimination as well as back pay and other damages.

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-- Tiffany Hsu

Bonds rally but stocks tumble after Fed unveils Operation Twist

Operation Twist was a pirouette for the bond market but a belly flop for the stock market.

The Federal Reserve’s announcement that it will shift some of its massive bond portfolio from shorter-term securities into longer-term securities sparked a furious rally in long-term Treasury bonds. But it led to a sharp selloff in stocks.

The Dow Jones industrial average sank 283.82 points, or 2.5%, to 11,124.84. The Standard & Poor’s 500 index lost 35.22 points, or 2.9%, to 1,166.76. It was the market’s biggest setback in a month.

Stock investors apparently doubted the Fed action will have a meaningful effect on the economy, and many were spooked by the central bank’s downbeat analysis of current conditions. The Fed said there were "significant downside risks to the economic outlook."

The reaction was happier in the bond market.

Though the announcement had been widely telegraphed, the $400-billion size of the Fed's shift from shorter-term Treasuries to longer-term bonds was larger than expected. That drove investors into longer-term Treasuries on the expectation that yields will fall further as the Fed buys those securities  over the next nine months.

Bond investors profit as yields on new bonds fall, increasing the value of older, higher-yielding securities.

The yield on the 30-year Treasury bond dropped to its lowest point since early 2009, falling to 3.01% from 3.20% on Tuesday.

The yield on the 10-year Treasury, a benchmark that influences mortgage rates, slid to a generational low of 1.86% from 1.94%.

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Long-term Treasury bond yields dive on new Fed plan

Moody's: BofA, Wells Fargo not too big to fail

-- Walter Hamilton

Photo: The New York Stock Exchange. Credit: Getty Images

Mortgage rates expected to slide on new Fed move

The Federal Reserve’s latest economic-stimulus move tells the markets one thing loud and clear: The Fed wants mortgage rates under 4%, and soon.

The central bank, in its post-meeting statement Wednesday, committed to shifting its $1.66-trillion Treasury bond portfolio more toward long-term bonds in an effort to bring down longer-term interest rates in general, including on mortgages.

Policymakers also threw the mortgage market another bone: The Fed said it would use the proceeds from maturing securities in its $885-billion mortgage-backed-bond portfolio to buy more of the same.

Until now, the Fed has been using those proceeds to buy Treasury bonds.

The shift back to mortgage bonds could bring $20 billion or more a month of Fed buying power into that market, said Walter Schmidt, a bond market analyst at FTN Financial in Chicago.

The announcement triggered a new rush of buying in mortgage securities. That should translate into lower rates quoted to home buyers and people hoping to refinance.

“It’s absolutely clear they’re targeting mortgages,” Keith Gumbinger, a principal at mortgage data firm HSH Associates in Pompton Plains, N.Y., said of the Fed.

The average 30-year mortgage rate in Freddie Mac’s weekly survey was a record low 4.09% last week, down from 4.60% in early July.

The 4% level is a psychological barrier for the market, but “I think we can breach that” soon, Schmidt said.

The 10-year Treasury note yield, a benchmark for mortgage rates, fell to 1.86% Wednesday, down from 1.94% on Tuesday and the lowest in at least 60 years. The previous low was 1.92% on Sept. 9.

RELATED:

Fed turns to 'Operation Twist' to stimulate economy

Bonds rally but stocks tumble on Fed shift

U.S. home sales rise in August

-- Tom Petruno

Photo: A sign advertises a home for sale in Illinois. Credit: Tim Boyle / Bloomberg News

Long-term Treasury bond yields dive on new Fed plan

Long-term Treasury bond yields are plummeting Wednesday after the Federal Reserve confirmed it would shift more of its mammoth Treasury portfolio toward longer-term securities.

Although the Fed’s decision, announced in its post-meeting statement, had been expected, the volume of purchases planned in 20- to 30-year bonds was larger than the market had anticipated.

So some investors and traders are pouring into 30-year T-bonds, driving yields down dramatically. The yield on the bond was at 3.03% at about noon PDT, down from 3.20% on Tuesday and the lowest since January 2009.

The 10-year T-note, a benchmark for mortgage rates, also was lower: It fell to 1.88%, down from 1.94% on Tuesday and a new generational low.

Over the next nine months, the Fed said it plans to sell $400 billion of the shorter-term Treasuries in its $1.66-trillion portfolio and use the proceeds to buy bonds maturing in between six and 30 years. The goal: pull down longer-term interest rates in general -- such as on mortgages, corporate and municipal bonds -- as another way to try to bolster economic growth.

“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed said in its statement.

With Treasury yields already so low, the question is how much further they can drop. For the moment, bond buyers seem to think long-term rates still have plenty of room to go lower.

Meanwhile, shorter-term Treasury yields are up modestly, reflecting the Fed’s plans to dump more of those securities on the market. The two-year T-note is at 0.20% vs. 0.16% on Tuesday; the five-year T-note is at 0.87% vs. 0.84%.

RELATED:

Fed revives 'Operation Twist'

GOP leaders urged Fed to back off from more stimulus

California sells $2.4 billion in bonds amid falling yields

-- Tom Petruno

Photo: The Federal Reserve Building in Washington. Credit: Karen Bleier / AFP / Getty Images

Fed will revive Operation Twist in hope of stimulating recovery

 

A divided Federal Reserve, trying to do what it can to perk up the dreary economy, announced Wednesday that it would revive a half-century-old scheme intended to make borrowing even cheaper for consumers, businesses and municipalities.

Under the plan, known as Operation Twist, the Fed would sell $400 billion in shorter-term Treasury debt in its portfolio and use the proceeds to buy an equal amount of longer-term bonds by the end of June 2012 –- a shift aimed at pulling down mortgage and other long-term rates to stimulate borrowing and spending.

"This program should put downward pressure on long-term interest rates and help make broader financial conditions more accommodative," the Fed said in a statement issued after an extended two-day meeting in Washington.

The new initiative, announced with a sobering assessment of the economy, was widely expected by investors and analysts, but few think it will do much to speed up job growth or the stalling recovery. And it flies in the face of calls by congressional Republican leaders who took the unusual step of sending a letter Monday to the Fed chairman, Ben S. Bernanke, urging him to avoid further stimulus action.

As many economists see it, the economy’s underlying problem is weak demand. Mortgage rates already are at record lows, and other borrowing costs are relatively cheap. But many corporations remain reluctant to make big investments, concerned about weakening sales and a climate of uncertainty in the global economy and fractious domestic politics. Many smaller businesses are finding it tough to get credit from wary lenders. And with home prices depressed and job growth and incomes stagnant, worried consumers are putting off major buying decisions.

"Really, it’s not a problem interest rates are too high,” said Dean Croushore, an economics professor at the University of Richmond whose own preference was that the Fed stand pat. He noted that research from Bernanke and others showed the original Operation Twist produced very modest results in the early 1960s.

Still, it’s understandable why the central bank would act, Croushore said. “They want to appear to be doing something. They don’t think it’s going to hurt; it could help a little bit, so why not?”

New holiday forecasts signal subdued season

Retail groups are predicting a quiet holiday season, with smaller gains than in 2010, as consumers struggle with prolonged economic worries.

The International Council of Shopping Centers on Wednesday forecast that U.S. holiday sales would post a moderate gain, with sales expected to increase 2.2% during the November-December combined period compared with the same time frame a year earlier. The group said retail momentum lately had been good but that there were economic roadblocks ahead that could dampen sales.

Last month, the group's chief economist predicted that sales during that period would be up 3.5%. In 2010, holiday sales rose 5% year over year in what was the best Christmas season since the recession.

Also on Wednesday, retail group ShopperTrak said it expected holiday retail sales to rise 3% and foot traffic to decrease 2.2% year over year, signaling that consumers will limit their shopping trips.

ShopperTrak said it expected foot traffic to continue decreasing through the end of the year because of high unemployment and gas prices. So far this year, shoppers have visited an average of 3.1 stores per shopping trip, down from 3.19 in 2010. "Converting fewer numbers of shoppers to buyers has never been more important for retailers," the group said.

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Retail sales rise a solid 4.4% in August

Many retail industry analysts predict a good holiday season

-- Andrea Chang

Photo: Shoppers will probably be watching their wallets again this holiday season. Credit: Kirk McKoy / Los Angeles Times

Pressuring the Fed Can Backfire

In a statement this afternoon, the Federal Reserve announced that it was engaging in more stimulus, by extending the average maturity of the securities on its balance sheet. This was basically what markets had expected, even though the Republican Congressional leadership wrote a widely reported letter to Ben S. Bernanke, the Fed chairman, urging him not to engage in any more easing.

Scratch that: “Even though” may not convey the right causal relationship between those two events. Some may argue that the letter could have encouraged the Fed to issue another round of monetary stimulus.

CATHERINE RAMPELL

Dollars to doughnuts.

Dollars to doughnuts.

The Federal Reserve is officially an independent body, and its autonomy is intended to shield it from short-term political interests that may be popular now but bad for the economy later.

Truth be told, though, efforts to put political pressure on the Fed go back much farther than this week. There have been many letters sent by Congressional committees and individual senators and members of Congress in just the last few years telling Fed officials to do or not do something or other, as well as in previous decades.

The letters linked above were generally for less significant decisions, of course. But in Congressional hearings and the like, legislators have attacked interest-rate policy and other important Fed actions, like quantitative easing, as well. Such confrontations, watched by a handful of people on C-SPAN, generally seem to be intended more as grandstanding than efforts that may actually change Fed policy.

When officials from the legislative and executive branches actually expect to influence Fed policy, they’re more likely to voice their arguments out of the public’s view, and in private meetings.

Why? As Bruce Bartlett, a former Treasury official from the George H.W. Bush White House and a contributor to Economix, explained by e-mail:

Historically, one of the main things that has held back politicians from publicly criticizing the Fed is that it can easily backfire and encourage it to do the opposite of what they want it to do. Certainly there have been many times in the ’80s and ’90s when administrations wanted an easier monetary policy. But they knew that the Fed jealously guards its independence and cannot allow itself to be seen as caving to administration pressure. Therefore, administration pressure to ease would force the Fed to remain tight lest it appear that it was caving to pressure. For this reason, administrations quickly learned that the best way to influence the Fed is through back channels. Historically, this has been done through the Treasury. I don’t know if it is still true, but for many years the Treasury secretary and the Fed chairman had breakfast every week, privately, no staff. This is the forum for the administration to tell the Fed what it should be doing.

I asked Mr. Bartlett whether he knew of specific cases where the Fed appeared to take an action precisely because there was pressure to do the opposite. He replied that he suspected such an incident occurred with Mr. Bernanke’s predecessor, Alan Greenspan:

When I worked at Treasury during the Bush 41 years, I had the definite sense that [Treasury Secretary Nicholas F.] Brady’s public criticism of Greenspan caused Greenspan to resist easing, which he might otherwise have done given economic conditions. Of course, I can’t prove it.

In today’s case, I doubt that the Fed decided to ease because of the Republicans’ letter; as I mentioned above, markets seem to think this was a sure bet already.

But because markets thought more easing was a sure bet, not easing after receiving this letter definitely would have made the Fed look as if it were caving to political pressure. In that sense, the Republicans’ attempt at exerting pressure seemed doomed to fail.

Employer healthcare costs expected to slow in 2012

  

Healthcare expenses for U.S. employers are expected to slow next year to their lowest level in more than a decade, but the cost of benefits for workers is likely to outpace the growth of their earnings, a national survey has found.

Companies expect their bills for health benefits to rise 5.4% on average next year, the smallest increase since 1997, according to preliminary results from a survey of nearly 1,600 employers by benefits consulting firm Mercer.

The smaller increase reflects cost-cutting efforts by employers. Many are moving workers into lower-cost health plans or slashing expenses by raising insurance deductibles.

In the absence of any cost-cutting, employers said they expect their average health benefit costs to rise 7.1% That’s down from about 9% each of the last five years.

The lower overall expenses are due partly to workers staying away from doctors in the tough economy, the Mercer report found. It said that corporate programs to improve employee health also may be having a positive impact.

“Earlier risk identification and health education … are keeping people with health risks and chronic conditions away from the emergency room,” said Susan Connolly, a Mercer partner. “And consumers are more aware that overuse and misuse of health care services will directly impact their wallets as well as their employer's budget.”

Even as the growth rate in costs slows, employers still expect to pass many costs to workers by raising deductibles, co-payments to visit the doctor or contributions to insurance premiums, the survey found.

Mercer said its survey offered an initial forecast for 2012 and that final results from 2,800 employers will be released by the end of the year.

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-- Duke Helfand

Photo credit: Los Angeles Times

Surge of holiday retail goods is starting at U.S. ports

The relative doldrums for import cargo traffic through the nation's major seaports are finally over, according to a report released this week by the Washington consulting firm Hackett Associates.

The group was predicting an 11.8% increase in cargo for September, compared with the same month last year, as retailers gear up for having goods on store shelves for the end of the year holidays.

That would end a summer-long downturn at the nation's major trade gateways and provide a welcome  employment boost for workers all along the international trade supply chain. Those jobs include the longshore workers who load and unload ships, short-haul and long-haul truck drivers, railroad employees and warehouse and distribution center staff, to name a few.

"With the most crucial spending period of the year just weeks away, retailers have made careful decisions on the amount of merchandise they need to properly stock their stores during the holidays,” said Jonathan Gold, vice president for supply chain and customs policy for the National Retail Federation, which commissions the monthly Global Port Tracker report.

Gold added that 2011 has been a very different year for goods movement than 2010, when retailers were shipping goods much earlier to restock inventories that had reached record low levels. “This year, retailers have the luxury of importing holiday goods later than last year, which better ensures their inventory levels will accurately meet consumer demand," Gold said.

The surge in imported goods is expected to continue through October, with Hackett Associates predicting an increase of 9.5%, compared with October, 2010. An increase of 8% is expected in November, as the surge begins to taper off. By December, cargo movement through the ports is expected to be only 4.5% above the year earlier totals.

Ben Hackett, founder of Hackett Associates, cautioned against expectations of a sustained recovery in goods movement beyond the end of 2011, saying that there were too many uncertainties about the strength of the U.S. economy.

“We should not be lulled into too much confidence by the relatively strong import volumes of August and September,” Hackett said. “These are linked to the low levels of inventory that needed to be raised to meet the return-to-school and post-Thanksgiving sales. The third quarter will be positive for the ocean carriers and retailers but that will turn into negative growth" in 2012.

The Global Port Tracker report covers the U.S. trade gateways of Long Angeles, Long Beach, Oakland, Seattle, Tacoma, New York-New Jersey, Virginia, Charleston, Savannah, and Houston. It focuses solely on imports and does not count U.S.-produced goods that are destined for sale overseas.

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Cargo terminal operators agree to cut emissions

A strong year for exports

Photo: Tugboats assist an MOL container ship at it prepares to dock at the TraPac terminal at the Port of Los Angeles. Credit: Port of Los Angeles.

--Ronald D. White

Kelley Blue Book warns of car-buying scam

Auto information company Kelley Blue Book is warning buyers not to fall victim to a scam using a fake version of its KBB.com website.

This is the same problem that has plagued rival auto information company Edmunds.com in recent years.

In both instances, the perpetrators are creating websites that imitate the look, feel and naming conventions of the companies and solicit money from car buyers.

Shoppers are sucked in though an attractive price offered for a car. They are then told to deposit a partial or full payment for the car in a special escrow account that supposedly operates as a guaranteed buyer-protection program by the auto information company.

They are told that after making the payment they will be shipped the car and have five days to get it checked out by a mechanic and test drive the vehicle.

But in reality, the money disappears and they never receive the car.

Both Kelley Blue Book and Edmunds provide online car reviews, price information and other car shopping tools but don’t sell vehicles or provide escrow services for automotive transactions.

Click here for tips from the FBI on how buyers can protect themselves from phony online car-buying scams or fraudulent buyer protection programs.

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-- Jerry Hirsch
Twitter.com/LATimesJerry

Photo: Kelly Blue Book corporate office. Credit: Kelley Blue Book.

Consumer Confidential: Rude workers, holiday sales, PETA porn

Here's your which-way-did-they-go Wednesday roundup of consumer news from around the Web:

--What's the top consumer complaint? Well, take your pick. But very high on many people's lists are rude employees. In fact, about one-third of consumers say they get treated rudely an average of once a month and that such episodes of uncivil behavior make them less likely to patronize those businesses, according to researchers from USC and Georgetown University. The researchers surveyed 244 consumers and found that incivility is widespread. Consumers recalled incidents involving an uncivil employee in many industries, and particularly in restaurants and retailing. Furthermore, managers may not be aware of how frequently their customers witness an employee behaving uncivilly because consumers seldom report the behavior to employers. Bottom line: Be nice to your customers. It's just good business.

 --Retailers are still waiting to see whether there's any ho-ho-ho this holiday season. A new forecast indicates that sales growth will likely not be as high as last year and that shoppers won't be hitting the stores as much. Retail sales for the November and December period are expected to rise 3% during what is traditionally the most critical period of the year for retailers, according to the research firm ShopperTrak. That would be below last year's 4.1% sales growth. Shoppers have been cautious about spending through 2011, faced with uncertain economic conditions, rising gas prices and high unemployment. Expect retailers to roll out plenty of sales to attract attention to their stores.

--PETA is mixing its animal-rights message with porn. People for the Ethical Treatment of Animals says it will launch a pornographic website to promote its stance. The group has already applied for the peta.xxx domain. PETA says the site will feature "tantalizing" videos and photographs, which will lead viewers into animal-rights messages. The idea is to reach a broader audience, by any means possible. The site could be up and running by November, although critics are already saying that by resorting to porn, PETA is alienating itself from a large swath of the population that might otherwise be sympathetic to its cause.

-- David Lazarus

Photo: Consumers hate it when employees are rude. Credit: American Movie Classics

 

Federal government wastes half of every tax dollar: poll

Americans are more skeptical than they’ve ever been of the federal government’s spending habits, convinced that it squanders 51 cents of each dollar it uses, according to a new Gallup poll.

Mistrust has steadily grown since the low 1986 estimate of 38 cents wasted on each dollar and is at the highest point since Gallup first considered the topic in 1979.

There’s only a 5% split by political party: Republicans say the government misuses 52 cents while Democrats peg the amount at 47 cents.

By ideology, though, there’s a wider differentiation, with conservatives guessing 56 cents and liberals estimating 44 cents. Back when George W. Bush was president, the sides were flipped. 

Age also plays a part, with young people less inclined to fault the government’s expenditures.

It’s unclear why Americans are so down on how The Man wields a wallet, Gallup said. Some may feel that the government throws money at unnecessary programs while others may feel that essential spending is done inefficiently. 

What’s clear is that respondents feel the federal government is far more bloated than state and local governments. Leaner operations mean that state governments waste just 42 cents while local ones misuse just 38 cents, according to the poll.

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More banking sector bailouts? When will the madness end?

When will we the lessons of the last round of bail-outs?

The IMF Global Stability Report suggests that banks might be €200-€300 billion down as a result of the Eurozone crisis.  The predictable cry has arisen that this shortfall should be made up by governments.  Really?  So, let's see.  Setting aside the bailouts of late 2007 and early 2008 and just starting when it got serious, we have the bailouts of Fannie Mae and Freddie Mac in early September 2008, which triggered the collapse of just about everything (most notoriously Lehman Brothers), and the bailouts of Autumn 2008.  Then we had the bailouts of Spring 2009.  The US version of quantitative easing involved the Fed buying up loads of the loss-making collateralised mortgage obligations that triggered the bust, so the bailouts continued through 2009.  Then from early 2010 we started re-branding our banking sector bailouts as "sovereign debt bailouts", as if changing the name would make it any less so that these were bailouts of banks.  So we had the "Greek" bailouts of the European and US banking sectors of Spring 2010.  Then the "Irish" bailout of the European, US, and UK banking sectors of Autumn 2010.  Then the "Portuguese" bailout Spring 2011.  Then the "Greece II" bailout of Summer 2011.  All banking sector bailouts.  All good money thrown after bad.

Four years.  Four years!  And still it appears that many folks don't get it.  It's not simply that these were banks that made some past losses and should have been able to raise capital to replace them but the Middle Eastern, East Asian and Norwegian sovereign wealth funds irrationally decided not to pony up the dough.  Some of these institutions simply could not continue as they were.  They have become value-destroying enterprises that need to be significantly restructured.  They need staff fired, assets written down, business lines shut.  There will be redundancies.  Some banks will cease lending to the kinds of enterprises they lent to previously, so some business and individuals will have to seek their credit elsewhere.  When governments refuse to allow these things to happen, but instead chuck money at the problem, they don't make the problem go away; they make it worse.  All they achieve is to retard the necessary and healthy process of restructuring, and extend the period of value-destruction.  In the meantime, they tax the poor to provide money to bail out the rich.  This is immoral, as well as economically destructive.

If Eurozone banks are bust, their creditors should make losses.  They lent the money; they got paid interest for taking a risk; the risk went bad; tough!  If the rich people that lent money to the banks weren't up for risking losing money, they shouldn't have lent it to the banks in the first place.  It's not up to poor people to pay taxes so that rich people can be spared the consequences of their gambles and mistakes.

Surely, surely after more than four years of bailout after bailout, even the most blindly stubborn fan of government intervention can see that it's not working.  Surely it's time for the madness to end?

U.S. home sales up sharply in August

Sales of previously owned U.S. homes were up sharply in August, a ray of light for the nation's beaten-down housing market. But economists are skeptical the gains will last. 

The number of homes sold rose 7.7% from July and were up 18.6% from August 2010, when sales were depressed after the expiration of a popular tax credit for buyers, according to the National Assn. of Realtors.

Although analysts had expected an increase in sales last month, many were surprised they rose as much as they did. Economists polled by Bloomberg News had estimated on average a 1.7% gain.

Economist Tom Lawler expected a stronger jump, based on regional data he had gathered.

"Of course, sales in many of those markets were extremely weak last August, which was pretty soon following the expiration of the home buyer tax credit," Lawler wrote Tuesday on the Calculated Risk blog.

Other economists also doubt that last month’s gain signals a turnaround.

"The recent trend in mortgage applications is downwards, so it is hard to see any further sustained rise in sales in the near-term," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

The Realtor group which reports monthly figures using a seasonally adjusted annual rate of sales, said

Homes sold in August at a seasonally adjusted annual rate of 5.03 million units in August, up from an upwardly revised 4.67 million in July and 4.24 million in August 2010.

The national median home price was $168,300 in August, down 5.1% from the same month a year prior.

Distressed property sales –- those of homes in foreclosure or where the borrower is in default –- accounted for 31% of transactions last month.

The inventory of properties fell 3% to 3.58 million previously owned homes available for sale, which represents a supply of about 8-1/2 months at the current sales pace. Economists typically consider a supply of six months to be healthy.

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White House forecasts high unemployment through 2012

BofA, Chase must do more to help troubled homeowners, Obama administration says 

-- Alejandro Lazo

twitter.com/alejandrolazo

Photo: Tract homes in Corona. Credit: Konrad Fiedler / Bloomberg

 

What to Expect From the Fed

There are three kinds of announcements the Federal Reserve may make Wednesday at 2:15 p.m., when it discloses the much-anticipated results of the latest meeting of its policy-making committee:

Full speed ahead. Growth is lethargic at best. Twenty-five million Americans cannot find full-time jobs. The Fed is responsible for addressing unemployment, it has undertaken a series of novel efforts to stimulate growth, and the Fed chairman, Ben S. Bernanke, has not discouraged speculation that he is ready to try again.

Investors are expecting a new effort to reduce long-term interest rates modeled on a 1960s program dubbed “Operation Twist.” The central bank has made borrowing cheaper for businesses and consumers by purchasing more than $2 trillion of government debt and mortgage-backed securities. By reducing the supply of securities available to other investors, it forced them to pay higher prices — that is, to accept lower interest rates — and to shift money into riskier investments with much the same effect.

The Fed could seek to amplify that impact by reorienting its portfolio toward longer-term securities, essentially taking on more risk without investing more money. That could force other investors, in turn, to take larger risks in the face of lower returns. And the hope is that the resulting drop in interest rates will nudge companies to build new factories, and consumers to buy new dishwashers.

Morgan Stanley, which expects the Fed to announce such a program Wednesday, said in a note to clients that it is “no silver bullet,” but could lower yields on 10-year Treasuries by up to 0.35 percentage points, similar to the drop from the Fed’s most recent purchases of $600 billion in Treasuries.

Check back in November. Some close watchers of the central bank expect that the Fed will defer any decision to “Twist” — or take any other major steps — until the board next meets in November, but that the board will make a smaller gesture Wednesday to signal its commitment to help.

Only a month has passed since the Fed announced that it intends to hold short-term interest rates near zero for at least two more years, and the board may want to wait before announcing further measures. The economy, after all, is growing at a modest pace and the options that remain available carry less power to lift growth and greater risk of consequences than those already deployed.

Moreover, investors already have driven down long-term interest rates in anticipation of action by the central bank. So long as investors remain convinced that the Fed will act eventually, there is little to be gained by unveiling such a program. Laurence H. Meyer, a former Fed governor who now leads the forecasting firm Macroeconomic Advisers, suggests the Fed could announce that it will invest the proceeds of maturing securities — about $20 billion each month — in longer-term debt.

“Together with a strongly worded statement, this decision could help avoid a significant market sell-off,” MacroAdvisers wrote in a note to clients predicting the Fed would announce such a gesture Wednesday, and then announce a revival of “Operation Twist” after the board’s November meeting.

We’re not doing anything new. Republicans have been increasingly vocal in their insistence that the Fed should stop trying to increase growth. They argue that the central bank’s existing efforts are not helping, and that new efforts could have negative consequences. Republican presidential candidates have made criticism of the Fed a central theme of the early campaign, and Republican leaders in the House and Senate sent a letter Tuesday to Mr. Bernanke warning against new measures.

“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” said the letter, signed by Mitch McConnell of Kentucky, the Senate Republican leader; Jon Kyl of Arizona, the Senate Republican whip; the House speaker, John Boehner of Ohio; and the House majority leader, Eric Cantor of Virginia.

A vocal minority of the Fed’s policy-making board shares this reluctance to take further action. Three of the board’s 10 members dissented from the board’s most recent effort to foster growth in August.

More public money required for bankers as IMF warns of €200bn blackhole in European banking system

Most International Monetary Fund reports are necessarily the result of compromise and negotiation. Rarely is the IMF allowed by its nation shareholders to tell it exactly as it sees it.

So the warning in the IMF's latest "Global Financial Stability Report" that European Union banks face a possible capital shortfall of €200bn to €300bn as a result of the eurozone sovereign debt crisis comes as quite an eye opener.

European governments will have fought this assessment tooth and nail, for not only does it seem to add fuel to what is already a raging panic around the solvency of the European banking system, it also provides some indication of quite how much more public money is going to be required for recapitalisation.

The IMF is at pains to stress that the big numbers cited are an estimate of the increased sovereign credit risk in the EU banking system over the past two years, not of the extra capital needed by banks as such. None the less, they do provide a reasonable guess at the size of capital at risk. This is, if you like, the IMF's assessment of the unrealised losses in the European banking system as a result of the sovereign debt crisis.

Small wonder that many European banks can no longer access private funding markets. Small wonder too that European governments are so alarmed at this assessment, statement of the bleedin' obvious though it might be. Another round of bank bailouts so soon after the last one is anathma to most Europeans, worse, in some respects than the idea of bailing out sovereign nations directly.

Yet if this crisis is ever to be resolved, the IMF is surely right in asserting that recapitalisation of the banks is one of the first things that needs to happen. Most people will find the idea that more than four years after the banking crisis began, the banking system continues to require squillions of public money almost beyond belief.

It was reasonable to assume that the balance sheet problems of most banks had been "cured". Plainly they have not. Indeed the process seems barely to have begun. The danger of not recapitalising banks is that they will choose instead to boost their capital buffers and solvency through further deleveraging, which would in turn prompt a second credit crunch. Unpalatable though it is, governments must act.

As the IMF Stability Report warns, "Time is running out to address existing vulnerabilities. The set of policy choices that are both economically viable and politically feasible is shrinking as the crisis shifts into a new, more political phase". Quite so.

China rejects U.S. complaint against chicken tariffs

The steamed chicken feet just haven’t been as unctuous since China slapped tariffs on U.S. poultry imports last year.

The price of American chicken, including the prized feet euphemistically called “phoenix talons” in China, shot-up between 50% and 100%, which will cost the U.S. poultry industry an estimated $1 billion in sales by the end of this year.

With that in mind, the U.S. Trade Representative announced Tuesday it had filed a complaint with the World Trade Organization saying China violated international trade rules when it imposed anti-dumping and countervailing duties on U.S. chicken.

“China seems to have failed to observe numerous transparency and due process requirements, failed to properly explain the basis for its findings and conclusions, incorrectly calculated dumping margins, incorrectly calculated subsidy rates and made unsupported findings of injury to China’s domestic industry,” the trade office said.

In a response Wednesday, China’s Ministry of Commerce released a brief statement rejecting the U.S. claim.

“China’s anti-dumping measures follow the law and are in accordance with WTO rules,” the statement said. “China will study requests from the U.S. carefully and handle them under the WTO’s dispute settlement system.”

Imports of U.S. chicken to China have plunged 90% since the imposition of the tariffs, which are largely seen as retaliation for U.S. duties of 35% on Chinese tires.

The two countries are also sparring over steel, electronic payment services, wind energy equipment and industrial raw materials such as zinc and bauxite.

Before the battle over chicken erupted, U.S. poultry farmers enjoyed steady, high-margin business selling unwanted parts to China.

In 2008, about half the $677 million worth of chicken sold to China were chicken feet, sold for up to 80 cents per pound compared to just pennies in the U.S., according to Time magazine.

While poultry is growing in popularity in China (KFC is the king of fast food in China and expanding rapidly), pork is still the overwhelming meat of choice.

By one estimate, Chinese consume three times as much pork as chicken at nearly 100 pounds per capita each year.

With inflation driving prices-up for pork in China, U.S. hog farmers have found themselves in the opposite situation of their poultry-raising countrymen. Imports of U.S. pork have risen five-fold the first seven months of this year compared to the same period last year, according to the state-owned China Daily.

China and the U.S. now have 60 days to resolve the current dispute on their own. If negotiations fail, the WTO can launch proceedings.

RELATED:

Pork shortage hurting Chinese economy

China still restricting foreign media, U.S. complains

White House defends tariffs on Chinese tires

--David Pierson

twitter.com/dhpierson

 Photo: A woman picks out chicken wings and legs at a market in Shanghai, China, on Wednesday, Sept. 21, 2011. Credit: Qilai Shen / Bloomberg.

The Logic of Cutting Payroll Taxes

Casey B. Mulligan is an economics professor at the University of Chicago.

Payroll taxes are by no means the only thing that stops people from working, but one of President Obama’s payroll tax cut proposals could nonetheless create a million or more jobs.

Today’s Economist

Perspectives from expert contributors.

Last week I estimated that the president’s proposal to cut the employer portion of the payroll tax by 3.1 percentage points could raise employment by more than a million, and maybe as much as three million.

Perspectives from expert contributors.

You might (as some readers wrote to me) think that a payroll tax cut is not, by itself, a good reason for employers to hire, and on that basis conclude that my estimate is way off.

I agree that jobs are not created by payroll tax cuts alone, and my estimate reflects that fact. About 131 million adults are working now, and 109 million adults are not working. If I’m right that the payroll tax cut would raise employment by one million to three million, that means that 106 million to 108 million adults would still not be working despite the payroll tax cut.

The chart below illustrates the results for the case that the payroll tax cut raises employment by exactly two million.

In other words, my estimate is that at least 97 percent of people not working would still not be working regardless of the payroll tax cut. That’s because, as you might deduce, payroll taxes are only one factor among many that determine how many people are employed. Nevertheless, raising employment by one million to three million would be an accomplishment for the president, and one that would be visible in the national statistics.

By the same logic, if someone were to propose raising the payroll tax by 3.1 percentage points, I would expect employment to be reduced by one million to three million. Again, the payroll tax is only one of many factors affecting hiring decisions, which is why my estimate of a payroll tax increase implies that more than 97 percent of workers would continue to work despite the increase.

Indeed, we all know people who would continue to work even if the payroll tax were raised by 30 percentage points, let alone three. We also know people who would not work even if taxes were eliminated completely.

But the fact that more than 100 million people are not employed, and more than 100 million people are employed, suggests that there could well be a million people (or two million, or three million) who are near the fence. For that small fraction of the population, there are almost as many things pushing toward making them employed as making them unemployed; a payroll tax cut could tip the balance.

For hundreds of millions of others, the balance is tilted too far for a payroll tax cut to make a difference. But while economists can debate the exact numbers, few of us can conclude that a small tax cut has no effect. Rather, a small tax cut should be expected to have a small effect — and at this point one worth seeking.