Financial life in a big town

Tropical Storm Harvey has made landfall over Belize and is expected to move into northern Guatemala later in the day.

The U.S. National Hurricane Center in Miami said Saturday that Harvey was centered about 35 miles (56 kilometers) south of Belize City, moving west at about 13 mph (21 kph). Maximum sustained winds were 60 mph (97 kph).

Harvey is expected to start weakening now that it’s moving over land. The storm is expected to bring as much as 6 inches of rain to parts of Honduras, Guatemala, Belize and Mexico’s Yucatan Peninsula. Forecasters say flash floods and mudslides are possible.

Tropical storm warnings were still in effect for the northern coast of Honduras from Punta Sal westward, as well as coastal Belize and Guatemala.

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The Toronto stock market headed sharply higher following a bruising series of losses as traders look to an afternoon announcement by the U.S. Federal Reserve for direction.

The S&P/TSX composite index gained 120.57 points to 11,791.53.

The Canadian dollar was down 0.2 of a cent to 100.72 cents US after earlier moving below parity, going as low as 99.95 cents US.

The Fed is holding its regularly scheduled meeting on interest rates and while the central bank won’t be moving on rates, investors will be looking for any hint about plans for any further stimulus measures to soften the blow of a slowing economy.

The main Toronto index has fallen almost 14 per cent just since July 22, reflecting a lack of confidence that political leaders and central bankers can manage Europe’s debt crisis and mounting expectations of the U.S. going back into recession.

A downgrade of U.S. government debt by Standard and Poor

The economy worsened in about half the country earlier this summer because of weak home sales and signs of a slowdown in manufacturing.

A Federal Reserve survey said Wednesday that seven of the Fed’s 12 bank regions reported slower growth in June and early July compared with the spring. That’s a worse showing than in the previous survey.

Of the remaining five districts, four reported modest growth. A fifth, the Minneapolis district, said its economy was disrupted by bad weather and the shutdown of Minnesota’s state government.

The job market remained weak in most districts, the report said. Employers added few jobs in June, the government said earlier this month.

Droughts and severe flooding badly hampered seven districts with large agricultural sectors, the report said.

Manufacturing output rose overall. But many districts reported only “steady or slowing” growth, the Fed’s report said. Only two districts reported rising manufacturing activity. Companies in three districts _ Philadelphia, Richmond and Atlanta _ reported slower growth.

The overall weak picture of the national economy echoes recent data on hiring and manufacturing. Economists expect growth for the April-June quarter, which will be reported Friday, to fall below 2 percent, the second straight quarter of anemic expansion.

The report, known as the “Beige Book,” is based on anecdotal information gathered by officials at the 12 Fed regional banks. It is released eight times a year and provides an on-the-ground snapshot of the economy. Wednesday’s report covered the roughly seven weeks between May 27 and July 15.

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Minnesota may soon have an end to its government shutdown, but re-starting the machinery of the state will probably take a few days.

Democratic Gov. Mark Dayton and Republican legislative leaders fell short Sunday of their goal of being ready for a special session Monday to finalize a deal struck late last week. They issued a joint statement saying the work “continues to move in a positive direction” but wasn’t over.

Dayton spokeswoman Katharine Tinucci said they didn’t expect to make any more news later in the night.

“Considerable progress has been made,” said the statement, issued Sunday night. “A special session will be called as soon as our work is completed, and all bills have been reviewed and agreed upon.”

If rank-and-file lawmakers sign off on the deal, it will end a shutdown that’s the longest in recent U.S. history.

But for residents whose lives have been disrupted, the relief won’t be immediate.

“It’s not like we can just flip a switch,” said Doug Neuville, a spokesman for the state Department of Public Safety, which has halted renewal of driver’s licenses and vehicle tabs during the shutdown. The computer systems used to issue renewals take time to bring back online, and the services won’t be immediately available, he said.

Same goes for closed rest stops and state parks. State budget office spokesman Jonathan Pollard said those must be cleaned and thoroughly checked before people can use them again. Road construction projects idled by the shutdown are likely to require safety checks before work can resume.

Licensing hang-ups for beer distributors could take several days to unsnarl as well, as returning state workers deal with backlogs that built up during the shutdown.

“It depends on the level to which the services were down,” Pollard said. “If you have an agency that’s mostly been up and functioning, it may be easier than if you have an agency that’s been completely shut down.”

The Dayton administration will likely consider the shutdown officially over once the governor signs new budget bills into law, Pollard said.

It’s not clear yet when that might happen. The governor and Republican leaders agreed late Thursday to the framework of an agreement to end the shutdown, and they spent the weekend trying to fill in the details. Once a session starts, Republican leaders need to get the spending bills through the House and Senate and to Dayton’s desk, which means getting rank-and-file Republicans to sign on to a deal that some will have a hard time with.

One big question after the last shutdown was whether state workers would be able to claim back pay for lost time.

But Michael Kuchta, spokesman for AFSCME Council 5, said a memorandum of understanding between unions and the Dayton administration before the shutdown granted laid-off workers the right to apply for unemployment with the understanding that they couldn’t claim lost pay when recalled.

The state could still face lawsuits, however, from businesses and citizens who decide they were harmed by the shutdown.

Tom Hanson, who was former Gov. Tim Pawlenty’s lead budget negotiator during the 2005 shutdown, said he hoped contingency plans drawn up then would serve the state well now.

“They are better prepared today, in 2011, than we were in 2005,” Hanson said. “There are detailed plans for starting up government after a shutdown.”

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Online search leader Google Inc. is taking yet another stab at social networking, as it tries to go up against Facebook in this wildly popular and lucrative segment of the Internet. This time the project is called Google+ and it aims to make online sharing more like real life.

Other social networking tools make selective sharing within small groups difficult. They don’t allow for the nuances people are used to in offline communication because they call so many acquaintances “friends,” said Vic Gundotra, senior vice president of engineering at Google.

Many Facebook users, for instance, find it difficult to limit their status updates to small groups of people so their co-workers aren’t exposed to party photos or their parents aren’t privy to flirtatious posts on their “wall.” Though Facebook has tried to address this with a much-hyped “Groups” feature, it’s not clear how many people use it.

Google, which dominates Internet search with a firm hold on two-thirds of the U.S. market, has been experimenting with different social tools since late 2009. “Buzz” was one major mishap. The product was a social network attached to Google’s popular Gmail service, and it wound up exposing email contacts that users did not want to share. Google eventually agreed to submit to independent audits of its privacy controls every other year for the next two decades as part of a Federal Trade Commission settlement payday loans.

Google shut down another attempt at online sharing, Google Wave, last August after unveiling it with much fanfare in 2009.

More than a year in the works, the project Google unveiled Tuesday lets users share things with smaller groups of people through a feature called “Circles.” This means only college buddies, say, or your favorite co-workers can see the photos, links our updates that you post.

Altimeter Group analyst Charlene Li has high hopes for the friend grouping feature. She said her biggest pet peeve with Facebook is its existing friend management tools. She noted that millions of people already use Google to share things with others via email, and Google+ looks like a natural extension of this type of sharing, making it more functional and organized.

“I think Facebook is going to have to up its game,” she said.

Google+ is undergoing what the company calls a “field trial,” so it’s accessible by invitation only and not yet available to the public. The company declined to say when it’ll be more widely available.

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The Food and Drug Administration is conducting an independent review of research on the public health impact of menthol cigarettes.

The federal agency on Monday gave an update on its review of an advisory panel report on the minty smokes, one of the few growth sectors of the shrinking cigarette business.

That report said that removing menthol cigarettes from the market would benefit public health because the flavoring has led to an increase in smokers and makes quitting harder free 3-in-1 credit report. It also said the FDA should consider other factors, including that a ban could increase counterfeit and smuggled cigarettes.

The report submitted in March was mandated under the 2009 law giving the agency authority to regulate tobacco. The FDA can’t ban nicotine or tobacco, but can limit what goes into products.

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The economy’s continuing struggles aren’t just confounding ordinary Americans. They’ve also stumped the head of the Federal Reserve.

Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy. And he said the troubles could continue into next year.

“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said. He said the weak housing market and problems in the banking system might be “more persistent than we thought.”

It was the Fed chief’s most explicit warning yet that the economy will face serious challenges next year. For several months, he had said the factors working against economic growth appeared to be “transitory.”

The Fed cut its forecast for economic growth this year to a range of 2.7 percent to 2.9 percent from an April forecast of 3.1 percent to 3.3 percent. It also cut its forecast for next year to a range of 3.3 percent to 3.7 percent from an earlier 3.5 percent to 4.2 percent. The Fed also said unemployment would stay higher than it had expected earlier.

In a policy statement issued at the end of a two-day meeting, the Fed blamed the worsening economic outlook in part on higher energy prices and the earthquake and tsunami in Japan, which slowed production of cars and other products.

But at a press conference afterward, the second of what the Fed says will be regular question-and-answer sessions with reporters, Bernanke conceded the economy’s troubles are more puzzling and potentially more long-lasting than a pair of temporary shocks.

The Fed announcement, at 12:30 p.m., had little effect on the stock and bond markets. Bernanke began speaking at 2:15, and stocks started falling at about 2:30, when he acknowledged that some of the economy’s problems could linger into next year. The Dow Jones industrial average closed down 80 points for the day.

The Fed’s statement Wednesday stood in contrast to the Fed’s more upbeat view when officials last met, eight weeks ago. At that time, the central bank said the job market was gradually improving.

Since then, the economic news has been gloomy. The government reported that the economy grew at an annual rate of only 1.8 percent in the first three months of the year. It isn’t expected to grow much faster in the current quarter. The economy added 54,000 jobs in May, far fewer than in the previous two months. Consumer spending has weakened, too.

The bad economic news is taking a political toll on President Barack Obama personal loans for people with bad credit. For the first time this year, an Associated Press-GfK poll found that fewer than 50 percent of respondents believe Obama deserves re-election. Obama’s overall approval rating fell to 52 percent in the new poll. It had risen as high as 60 percent after the U.S. raid last month in Pakistan that killed Osama bin Laden.

The new Fed statement acknowledged a slowdown over the past two months. “They see the weakness,” said Bruce McCain, chief investment strategist at Key Private Bank. “You can hear their concern about economic weakness despite their hope it is likely to be temporary.”

The Fed stuck to its plan to bring an end this month to a program to help the economy by buying $600 billion in government bonds. The Fed also intends to keep short-term interest rates near zero “for an extended period,” a phrase it has been using the past two years. Though the central bank noted that inflation has risen, it expects that to be temporary as well.

The Fed has kept rates at ultra-low levels since December 2008. Abandoning the promise to keep them there for an “extended period” would be viewed as a signal that the Fed is preparing to raise interest rates. Many private economists think it will be another full year before the economy has recovered enough for the Fed to do it.

Economists looking for clues to the Fed’s next move didn’t get much help Wednesday. “There’s no obvious hint of tightening here,” said Jim O’Sullivan, chief economist at MF Global. “There’s no hint of new easing.”

The bond-buying program has been controversial. Supporters say the bond purchases have kept interest rates low and encouraged spending. Low long-term rates make it easier to buy homes and cars and for companies to expand.

They also argue that those lower rates fueled a stock rally. Since Bernanke outlined plans for the program last August, the Standard & Poor’s 500 index is up 24 percent. Lower rates made stocks more attractive to investors than bonds, whose yields were falling.

The average rate on a 30-year mortgage has stayed below 5 percent for all but two weeks this year and was 4.5 percent last week. But low rates haven’t helped home sales much. They fell in May to the lowest level since November.

Critics, including some Fed officials, saw things differently. They warned that by pumping so much money into the economy, the Fed increased the risks of high inflation later.

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Shaw Communications, the dominant cable company in Western Canada, said its quarterly net profit rose 20 per cent as it cut costs while pausing to reassess its planned entry into the booming wireless telecoms market.

Shaw, which bought wireless spectrum in 2008 but has lagged others in entering the market, said earnings for the quarter ended Feb. 28 were $167.3 million, or 37 cents a share, on revenue of $1.2 billion.

Both were in line with analyst estimates.

Shaw said it cut 550 jobs in the quarter, including 150 managers, in a restructuring that cost between $25 million and $30 million but should save more than $50 million a year.

The Western Canada-focused company is fighting telecom rival Telus

Long and variable lags.

I doubt that inviolable tenet of how monetary policy works is etched into the cornerstone of the Federal Reserve Board in Washington. It is, however, an article of faith for anyone who has ever worked there.

And yet, Fed Chairman Ben Bernanke and his core group of doves at the Fed seem comfortable with the overnight rate at an emergency-like 0 percent to 0.25 percent when the economy is growing at a modest pace, private-sector job growth has topped 200,000 in the last two months and sensitive raw materials prices are skyrocketing.

Where’s the justification?

At 8.8 percent in March, the unemployment rate is still unacceptably high for the dual-mandated Fed, charged with monitoring both unemployment and inflation.

And with no acceleration in wages — average hourly earnings are stuck at a 1.7 percent annual increase — Bernanke is comfortable he can minister to the unemployed without any adverse effects on intermediate-term inflation and inflation expectations.

That would be a mistake. Empirically, prices lead wages. If it were the other way around, wages would be in some kind of leading inflation indicator, such as the one created by the Economic Cycle Research Institute.

While the ECRI refused to discuss the composition of its Future Inflation Gauge when I called Friday, wages aren’t in the index because “they aren’t a good leading indicator of inflation,” a then-less-secretive research director told me in 2000.

Your Father’s Economy

Causation can run in both directions, with prices and wages feeding off one other, according to Gad Levanon, associate director of macroeconomic research at the Conference Board in New York. “Overall inflation leads both core inflation and average hourly earnings based on a cross correlation test.”

The Fed operates on the premise that core inflation, which excludes food and energy, leads overall.

The focus on wages is a residual from the wage-price spirals of the 1970s: no wage increase, no inflation.

Before deregulation — when companies were shielded from outside competition — labor unions could negotiate a contract for their workers, and the employer would pass the higher costs along to consumers in the form of higher prices.

Union membership declined to a 70-year low of 11.9 percent last year, according to the Bureau of Labor Statistics. For the first time in history, more union workers were employed by the government than by the private sector. Only 7.2 percent of the private-sector workforce was unionized.

Symptom, Not Cause

In today’s world, any union demand for a wage increase is likely to be met with a shift in production: from Michigan to South Carolina for the auto industry; from North Carolina to China for textiles.

To the extent that labor has any negotiating power in a de- unionized, globally competitive world, wages are set “based on last year’s inflation,” said Joe Carson, director of global economic research at AllianceBernstein in New York.

Think of wages as a price: the price of labor. They happen to be the biggest share of compensation costs in services industries. That still doesn’t mean they cause inflation. Rather, they are a symptom of it.

Some Fed bank presidents understand the central bank can’t wait to see higher wages before starting to withdraw the stimulus. The Minneapolis Fed’s Narayana Kocherlakota and Richmond’s Jeffrey Lacker are making noises about raising interest rates by year-end. The Philadelphia Fed’s Charles Plosser has talked about calling a halt to the central bank’s second round of quantitative easing, in this case the planned purchase of $600 billion of Treasury securities set to conclude in June.

Dudley Do-Right

For Bill Dudley, that talk is premature. Speaking in Puerto Rico Friday, the New York Fed president said unemployment is much too high (agreed); the “coast is not completely clear” for the U.S. economy (it never is); and commodity prices are experiencing “a little bit of a bubble” (this from the ex- post-only bubble-identification gang) and have “virtually nothing to do with U.S. monetary policy.”

Reporters let him get away with that? Last month, Dudley had his head handed to him by an audience in Queens, New York. When he tried to tell a group of ordinary folks inflation was under control because technology prices continue to fall, members of the crowd asked him when he last went grocery shopping.

What’s more, Dudley’s view that commodity price increases aren’t the Fed’s doing runs counter to the Fed’s stated intentions for QE2. In a Nov. 4 op-ed in the Washington Post, Bernanke outlined the channels through which the Fed’s bond purchases would operate. One was through higher stock prices, which would increase consumer wealth and trigger spending.

Measure of Success

Success! The Dow Jones Industrial Average is nearing a three-year high, up almost 25 percent since Bernanke first hinted at QE2 in late August.

Surely Dudley understands that commodity speculators aren’t immune to the same incentives — zero-percent interest rates — that encourage investors to move out the risk curve.

The Fed should be careful what it wishes for.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

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Shoppers came back in force for the holidays, right to the end. After two dreary years, Christmas 2010 will go down as the holiday Americans rediscovered how much they like to shop.

People spent more than expected on family and friends and splurged on themselves, too, an ingredient missing for two years. Clothing such as fur vests and beaded sweaters replaced practical items like pots and pans. Even the family dog is getting a little something extra.

“You saw joy back in the holiday season,” said Sherif Mityas, partner in the retail practice at A.T. Kearney.

A strong Christmas Eve augmented a great season for retailers. The National Retail Federation predicts spending this holiday season will reach $451.5 billion, up 3.3 percent over last year.

That would be the biggest increase since 2006, and the largest total since a record $452.8 billion in 2007. The holiday season runs from Nov. 1 through Dec. 31, so a strong week after Christmas could still make this the biggest of all time. Spending numbers through Dec. 24 won’t be available until next week and final numbers, through Dec. 31, arrive next month.

The economy hasn’t improved significantly from last year. Unemployment is 9.8 percent, credit remains tight and the housing market is moribund. But recent economic reports suggest employers are laying off fewer workers and businesses are spending more. Consumer confidence is rising.

“I was unemployed last year, so I’m feeling better,” said Hope Jackson, who was at Maryland’s Mall in Columbia on Friday morning. Jackson bought laptops and PlayStation 2 games for her three daughters earlier in the season but was at the mall on Christmas Eve to grab $50 shirts marked down to $12 at Aeropostale.

Some spending growth online has been driven by free shipping offers and convenience. From Oct. 31 through Thursday, about $36 billion has been spent online, a 15 percent increase over last year, according to MasterCard Advisors’ SpendingPulse.

Taubman Centers and Mall of America have reported strong clothing sales, which was a hard sell last year. Jewelry sales sparkled throughout the season.

Stores expect solid profits because they didn’t have to slash prices as Christmas neared, analysts say.

Some habits adopted during the recession lingered. Shoppers used cash more and credit cards less.

The final six days of the holiday shopping season are Sunday through next Friday. They’re only 10 percent of the 61 holiday shopping days but can account for more than 15 percent of spending.

For the economy, the key question is whether strong spending this holiday season will continue into the new year.

Still, stores were encouraged by what they saw in the final stretch of the holiday season.

Even pets made it back onto gift lists this year. Three Dog Bakery, a pet-supply chain in Clinton Township, Mich., whose specialties include $15.99 jars of banana-nut dog cookies, opened three years ago at the start of the recession.

“We opened at the worst possible time in the world. Everyone was pulling back,” owner Chad Konzen said.

Wednesday, the store had its best day ever. “Gourmet, all-natural dog treats are not a necessity,” Konzen said. “But now people are feeling more comfortable. You can only be thrifty for so long.”

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