With nothing else on the economic calendar, the market will be focused on evaluating the president’s much-anticipated jobs speech Thursday evening. The day’s other speech, from Fed Chair Ben Bernanke, had turned out be somewhat of a disappointment relative to what the market was looking for. It appears now that whatever the Fed will be doing will be at its two-day meeting later this month.
The president laid out quite an ambitious plan, at least in terms of its size. More than half of the $447 billion plan provides for tax cuts for employees and employers, while the rest targets infrastructure spending and extension of unemployment benefits. The bulk of the tax cut is an extension and expansion of the payroll tax cut that is already in place and set to expire at the end of this year. Given the concern in Congress over deficits and debt, the president asked the ‘Super Committee’ to look for additional cuts to pay for this package.
The plan is quite front-loaded, with more than 70% of the amount getting used up in 2012. Estimates for its impact on the economy’s growth momentum vary, but range generally in the 1.5% to 2.5% vicinity. Those growth numbers are attractive and timely, given the current fears in the market of an impending recessionary downturn for the economy.
But we all know that the entire package has no hope of getting enacted in its present shape. The best that can happen would be for the tax cuts to pass Congress. Even that would be no mean achievement given what we saw during the debt ceiling debate.
As Bernanke rightly pointed in his Jackson Hole speech some time back, the economy needs fiscal initiatives at this stage to put it back on the growth trajectory. The Fed has done effectively all it it could under the circumstances. Bernanke reiterated in his speech yesterday that they have policy tools at their disposal that they stand ready to deploy should the need arise.
But it is reasonable to question the effectiveness of measures like ‘Operation Twist,’ aimed at bringing long-term interest rates down, in the current already-low interest rate environment. This leaves the president’s plan effectively the only game in town. It doesn’t go far enough in its scope and reach. One desirable provision left out of the plan concerns the repatriation of corporate profits — a targeted tax holiday on that front would have been a very good addition to this plan.
In corporate news, McDonald’s (MCD) August same-store sales came out weaker than expected. We also had Texas Instruments (TXN) provide a downbeat outlook for the third quarter after the close on Thursday, citing soft demand conditions. And Bank of America (BAC) is reportedly considering cutting as many as 40,000 jobs as part of its restructuring efforts, media reports indicate.
