UNITED STATES ECONOMIC REVIEW

UNITED STATES ECONOMIC REVIEW

A measure of consumer prices climbed more than forecast in June and manufacturing stalled, highlighting the dilemma faced by Federal Reserve policy makers as they seek to boost growth without stoking inflation.

Consumer prices excluding food and energy climbed 0.3 percent for a second month, the biggest back-to-back gain in three years, the Labor Department said today in Washington. Factory production was unchanged last month.

An unexpected decline in consumer sentiment, also reported today, signaled that households are being squeezed by mounting unemployment, rising costs and a slumping housing market. At the same time, the pickup in prices makes it more difficult for the Fed to adopt fresh measures to spur growth.

The Standard & Poor’s 500 Index rose 0.6 percent to 1,316.14 at the 4 p.m. close in New York. The yield on the 10- year Treasury note fell to 2.91 percent from 2.95 percent late yesterday.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.8, the lowest reading since March 2009, from 71.5 the prior month. The gauge was projected to rise to 72.2

Additional Action

Fed Chairman Ben S. Bernanke told Congress this week that the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling.

He said they have to keep all the options on the table because the economy still needs a good deal of support.

At the same time, Bernanke said there is also the possibility that inflation could pick up in a way that would require the Fed to begin tightening credit and exit its record monetary stimulus.

The biggest drop in energy costs since 2008 masked growing inflation in other goods and services like autos, clothing and hotel rates, today’s Labor Department report showed. Including food and energy, the consumer-price index decreased 0.2 percent, the first drop in a year, compared with the 0.1 percent drop forecast by economists.

The so-called core consumer price index, which excludes volatile food and energy costs, was forecast to increase 0.2 percent in June.

Overall Prices

Overall prices increased 3.6 percent in the 12 months ended June, the same as the year-over-year gain in May. The core CPI rose 1.6 percent from June 2010, the most since January 2010.

Energy costs decreased 4.4 percent from a month earlier, the biggest decline since December 2008. Food costs climbed 0.2 percent, the smallest advance this year.

Apparel costs jumped 1.4 percent, the biggest surge since March 1990.
Lodging away from home, which includes hotel rates, soared 3 percent after a 2.9 percent gain in May, while the cost of a new car increased 0.6 percent.

Food, Gasoline

We haven’t seen the full impact of apparel prices on the consumer. When you combine that with some of the continued pressure with the consumer on general products, food, gas, commodities that they are experiencing and no job growth, we’re still cautious here in the U.S.

Bernanke told Congress this week that most of the recent rise in inflation appears likely to be transitory. Stabilization of oil prices and other commodities, along with slack in the labor market, indicates inflation will moderate.

Fed policy makers aim for long-run overall inflation of 1.7 percent to
2 percent, according to their June forecast. Their preferred price gauge, which excludes food and fuel, rose 1.2 percent in May from a year earlier.

The jump in auto prices may reflect shortages in parts caused by the tragedy in Japan, indicating costs may level off as the imbalances are corrected, economists said.

Auto Parts

With sufficient auto parts later in the year and oil prices are coming down, so that impulse on core prices will fade.

Manufacturing, which accounts for about 12 percent of the economy, may be restrained by slower consumer demand and a buildup in inventories even as automakers rebound from parts shortages after the Japan earthquake.

Overall industrial production, which adds mining and utilities to manufacturing, increased 0.2 percent in June after a revised 0.1 percent decrease the prior month, today’s Fed report showed.
Economists projected a 0.3 percent rise in June.

Capacity utilization, which measures the amount of a plant that is in use, held at 76.7 percent in June. The gauge compares with the average of 79.5 percent over the past 20 years.

Production of automobiles and parts fell 2 percent, the Fed report showed. Excluding autos, manufacturing rose 0.2 percent after a 0.1 percent increase.

Toyota Motor Corp. and Honda Motor Co.’s U.S. deliveries each fell 21 percent in June from a year earlier, while General Motors Co. and Ford Motor Co. saw sales gain 10 percent, less than estimates, according to industry data on July 2.

In Today's Economics of Marriage, it's a Man's World

USA Today

If you think women still reap more economic benefit than men do from marriage, you may be living in the past.

Today, men are better off economically because their wives are, too, suggests a new study on the economics of marriage by the Pew Research Center.

It shows women's education and earnings advancements are translating into overall improvement for men.

"Marriage is a different deal than it was 40 years ago," says Pew economist Richard Fry, a co-author of the study. "Typically, most wives did not work, so for economic well-being, marriage penalized guys with more mouths to feed but no extra income. Now most wives work. For guys, the economics of marriage have become much more beneficial."

Pew used Census data from 1970 and 2007 to compare U.S.-born married people ages 30-44 — ages when "typical adults have completed their education, gone to work and gotten married," the study says.

The data show more women than men today have college degrees. In 1970, 64% of graduates were men and 36% were women; in 2007, 53.5% were women and 46.5% were men. Also, women's earnings grew 44% from 1970 to 2007, compared with 6% for men. Although men, on average, still make more, women's sharper gains have narrowed the gap.

Now, more women marry men with less education and lower earnings, and more men marry women who are more educated than they are and may earn more, Fry says.

"Just as women are saying they want more from marriage than an economic security blanket, men are more open to marrying women with more education and earnings," says historian Stephanie Coontz, author of Marriage: A History.

But economist Betsey Stevenson, an assistant professor at the University of Pennsylvania's Wharton School in Philadelphia, says Pew's analysis is too limited.

"What they're raising is really an important question: Who has benefited more from increasing earnings of women in the labor market?" But she says the study doesn't look at other benefits, including who spends more within families. "Simply comparing earnings and educational attainment is not a very illuminating way to answer that question."

Stevenson says the study does provide further evidence that one-breadwinner marriages are being replaced with marriages of "more equal market producers."

Americans Win Economics Nobel

Elinor Ostrom celebrates winning the Nobel Prize
in economics at Indiana University on Monday.

Story from the Wall Street Journal

Two American economists, Elinor Ostrom and Oliver Williamson, who study economic governance and the way decisions are made outside the markets, were awarded Monday with the Nobel Prize in economics.

Ms. Ostrom, who teaches at Indiana University in Bloomington, Ind., is the first woman to win the prize, which previously had been awarded to 62 men since it was launched in 1969.

The judges cited Ms. Ostrom's "analysis of economic governance, especially the commons," the way in which natural resources are managed as shared resources.

Her work challenged the view that when people share a finite resource, they'll end up destroying it. Such "a tragedy of the commons" argues that resources that are important for the common good need to be highly regulated, or privatized.

It's an area of research that she said was relevant to questions about global warming, and suggests that decisions by individuals can help solve the problem even as governments work to reach an international agreement.

"Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, [Ms.] Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories," the Nobel judges noted.

That's because over time, people often develop institutions, social networks and ways of interacting that solves the problem. Lobstermen in Maine, for example, have come to informally regulate, and restrict entry to, the areas where they work. Where these "lobster gangs" are prevalent, there are more lobsters.

On a larger scale, these social networks don't always work as well, notes Yale University environmental economist Matthew Kotchen -- there are fewer lobsters, for example, further away from Maine harbors. What's important, he says, is that Ms. Ostrom's work points out the importance of the networks that many economists had ignored, in part, because they couldn't come up with elegant models to describe how they worked.

"Just because you don't know how to model them doesn't' mean you can ignore them," he said.

Ms. Ostrom, 76 years old, who was interviewed by phone during the public announcement in Stockholm, described the prize as "an immense surprise." Her University of California at Los Angeles Ph.D. is in political science, but she said she considers herself a political economist.

Mr. Williamson, 77, who teaches at the University of California at Berkeley and earned his Ph.D. at Pittsburgh's Carnegie-Mellon University, was cited for "for his analysis of economic governance, especially the boundaries of the firm" -- the reason some economic decisions are made at arm's length in markets and others are made inside a corporation.

Mr. Williamson's work stems from time he spent in the late 1960s working in the Department of Justice's Antitrust Division, and noticing that there was little attention to the internal workings of companies.

"The way economists used to think of the firm was as a black box that transfer inputs into outputs, and they didn't look inside," explained Mr. Williamson, who was woken up by the call from the Nobel committee at 3:30 in the morning. "We opened up the black box."

What he found was that many economic decisions that standard theory said would be more efficiently left to the market place were actually better left within a firm.

"Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent," the Nobel judges said. "But when market competition is limited, firms are better suited for conflict resolution than markets."

The economics prize is the only of the six Nobel prizes not created in Swedish industrialist Alfred Nobel's 1896 will, and is officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009.

The two economists will share a 10-million kronor prize -- $1.42 million, €980,000. Ms. Ostrom said she hopes to devote the proceeds to supporting research and graduate students.