U.S. economy improving according to Fed

Story first appeared on USA Today

Activity is expanding in all 12 Federal Reserve districts, according to the Fed on Wednesday, showing that the nation's economy has proven to be surprisingly resilient for the past six weeks despite the budget standoff in Congress.

The Fed's Beige Book report said the New York and Philadelphia Federal Reserve bank districts have rebounded from the near-term effects of Super Storm Sandy, and the pace of growth picked up in the Boston, Richmond and Atlanta regions while slowing in St. Louis.

Still, uncertainty among businesses because of the so-called fiscal cliff of tax hikes and spending cuts — which was partially resolved early this month — dampened the retail outlook in some areas and prompted some employers to hold off hiring. And the economic slowdown in Europe hampered some manufacturing exports.

Consumer spending increased across the country, but holiday sales were somewhat disappointing in the New York, Cleveland, Atlanta, Chicago and San Francisco districts.

Government figures released this week show holiday sales rose 2.7% over last year, far less than the 5.5% pace of 2010 and 2011. Sales of clothing, shoes and furniture were brisk in Boston, while online sales were strong in San Francisco. But retail sales were flat in the Richmond area and the fiscal cliff dampened the outlook in Philadelphia, Kansas City and Dallas regions.

Auto sales, however, remain a bright spot, with sales steady or stronger in 10 districts.

Tourism, meanwhile, rebounded in the Mid-Atlantic and Northeast following the Super Storm.  And tourism in Boston, Atlanta and San Francisco was bolstered by surging business and international travel.

Manufacturing, however, was mixed, with six districts growing, three contracting and two reporting little or no change. Rising aerospace and chemical production fueled growth in the Boston, San Francisco and Dallas districts. And the resurgent auto and housing sectors helped support manufacturing in Chicago and Philadelphia.

But uncertainty about the fiscal cliff tempered growth in the Richmond area. And steel and auto production slowed in Cleveland.

Overall, however, manufacturers were optimistic about coming months in New York, Philadelphia, Atlanta, Minneapolis and Kansas City.

The housing market also continued its comeback, with activity increasing and prices rising in most districts. Low interest rates and affordable prices sparked home sales in Boston. Still, the hotter market is creating some bottlenecks, with Kansas City reporting higher lumber and drywall costs that limited construction.

Commercial space leasing was more tepid, however, with Boston real estate officials reporting a drop in activity due partly to the fiscal cliff and demand for commercial real estate loans softening.

The budget standoff also caused some employers to delay hiring, particularly in Boston, Richmond, Atlanta, Chicago, Kansas City and San Francisco. Companies in Chicago that do business with Europe also scaled back hiring plans.  Atlanta and Kansas City businesses have put off adding to their staff due to the new health reform law.

Some business leaders cool to deal

originally appeared in USA Today:

Wall Street investors cheered the deal to avert the fiscal cliff — but some executives who invest in job-creating plants and equipment gave it a much cooler reception.

As President Obama prepared to sign a compromise bill that raised taxes half as much as he once proposed, while postponing scheduled cuts in spending, Honeywell's CEO said the move to cut the deficit wasn't enough to get him writing checks again.

That's one reason the economic outlook for early 2013 is still modest, even as the stock market celebrated the deal, pushing up the Dow Jones average more than 300 points to its highest close since December 2011.

Nothing is going to change from where I was two weeks ago, he said, a leader of the Fix the Debt coalition of chief executives lobbying Congress to kick-start negotiations on issues from corporate taxes to entitlement spending. We'll still continue with a plan that's diminished from where we were six or seven months ago.

The fiscal cliff deal is too incomplete to get businesses investing much again soon, business groups say. The package delays spending cuts that had been scheduled to take effect this week for two months.

The bill did not raise the government's borrowing limit, setting up a potentially crippling fight about raising the debt ceiling next month, Cote said. When Congress balked at raising the limit in August 2011, that contributed to a 20.7% drop in the stock market between July and October.

President of the Committee for a Responsible Federal Budget, said it's nearly inconceivable that the bill will release pent-up demand from businesses that want to buy equipment and software, and build or expand buildings.

The deal falls well short of what's needed, she said.

A slowdown in business investment was one of the biggest reasons the recovery slowed in mid-2012, according to government data, and it was highlighted by economists as proof that fear of the fiscal cliff was hurting business. Investment in equipment and software dropped 2.6% in the third quarter after rising 18.3% in the same stretch of 2011.

But some companies won't recover confidence until they know what happens to federal spending.

Until the possibility of automatic spending cuts, or sequestration, is eliminated, it's still hanging over our industry, according to a spokeswoman for Lockheed Martin, the nation's biggest defense contractor. Until it is, it stifles investment in plants, equipment, people and (research and development).

The director of tax policy for the National Federation of Independent Business said the measure's provision extending an existing tax break for investment in equipment up to $500,000 could bolster investment by smaller businesses. That's a provision business owners tell us they use, and it's a good incentive, he said.

Honeywell CEO in the Middle of Fiscal Cliff Standoff

originally appeared in The Wall Street Journal:

Honeywell International Inc. HON +1.00% chief executive David Cote gives the orders at the $48 billion industrial giant, but lately he has been taking directives from President Barack Obama and congressional Republicans, in hopes of finding a fiscal-cliff solution.

At a recent White House meeting with several CEOs, Mr. Obama told Mr. Cote, seated across from him, "Tell Republicans you will give them cover for tax increases if they want tough entitlement reform."

A few days later on Capitol Hill, House Republican whip Kevin McCarthy told the Honeywell chief, "Tell the White House the impact that failing to cut spending will have on the market."

Mr. Cote (pronounced KOH-tee) is the business executive most in the middle of the fiscal-cliff debate. He and senior White House adviser Valerie Jarrett talk or email several times at all hours every day. At the other end of Pennsylvania Avenue, he visits congressional offices a couple of days weekly, bringing along other corporate titans and a newly funded CEO campaign for a deficit compromise.

Mr. Cote's role shows a big change from last year's messy and inconclusive debt-ceiling debate: Business leaders aren't sitting on the sidelines this time. "We're not confident that our guys can govern anymore," says Mr. Cote, who switches out of the jeans he typically wears into a suit and tie when summoned by lawmakers.

He has received signals from both parties of possible compromises on the fiscal-cliff issues, about which Mr. Obama and House Speaker John Boehner met Thursday. Earlier in the day, Mr. Cote said he was getting "worried" that a sizable, credible deal was looking more difficult. His fear: It might be replaced by an "anemic deal requiring this country to keep fighting over these issues while the rest of the world becomes more competitive."

Mr. Cote's efforts are stirring controversy. To show his personal commitment to a fiscal deal, he says he would be willing to pay income tax at 39.6%—the highest rate in the Clinton administration—instead of the current top rate of 35%, or to lose deductions, provided significant cuts are made in entitlement programs such as Medicare.

Small businesses on the right and safety-net groups on the left scoff that Mr. Cote, whose total direct compensation was $25 million last year, can afford to be magnanimous.

Small businesses are more sensitive to personal tax rates—the rates at which many are taxed, via their owners' personal returns. That helps explain why small business is more closely aligned than big business with the GOP opposition to raising personal tax rates for anyone.

"A higher income-tax rate on us means we can't invest in new equipment or personnel," says Albert Macre, an owner of Triple Play Café in Steubenville, Ohio. "Maybe if I were making five to 10 million dollars a year like the big CEOs, I would be willing to pay higher taxes too."

Rep. Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, says Mr. Cote "has tried to put pressure on the president and on us to get a deal...but I don't agree with all the policy specifics he's advocating." Mr. Camp says he told Mr. Cote the CEOs will be less effective in helping get a deal so long as they focus on higher tax rates, which "aren't the way to get Republicans to buy in."

Mr. Cote's efforts could benefit his business. Absent a cliff deal, deep cuts in federal spending on defense and many other programs will kick in. Success in averting them could help Honeywell, an aerospace and defense contractor that draws 10% of its $38 billion in annual sales from the government.

Mr. Cote also is getting on a first-name basis with power players and earning good will, goals that can take companies millions in campaign cash and lobbying fees to achieve.

"I'm being accused of all kinds of nefarious motives just because I'm a CEO," says Mr. Cote. He also concedes his cause diverts a lot of time from his job but says he tries to make it up from his personal time. In any case, "the best for my shareholders is a robust economy," he says, "which can't happen if the country is gridlocked over debt."

Whatever their motives, Mr. Cote and fellow big-business leaders are bringing some financial muscle to the table. They have funded an organization called "Fix the Debt," set up last summer by a bipartisan group to push for a comprehensive fiscal solution. While it can't contribute to campaigns, it can run glowing ads for members who face political consequences.

Mr. Cote is far from the only CEO pushing for a fiscal deal or willing to see tax rates go higher. But he is a central player. "People on both sides of the aisle are sending messages through Dave," says Senate Finance Committee Chairman Max Baucus (D., Mont.). "He's become an active participant…while warning that companies will continue to hoard cash and cut jobs if we fall off the fiscal cliff."

Mr. Cote says he doesn't "want to get dragged into being just a messenger…I tell each side what I think helps resolve this big problem for our economy."

His new role has been a "revelation," he says, on how dysfunctional Washington is. "I meet people on both sides I like and find reasonable, but they aren't working together."

A onetime cod fisherman, Mr. Cote became a General Electric Co. GE +1.04% executive and was in the running to succeed CEO Jack Welch 12 years ago. Once Mr. Cote realized he wouldn't get the top spot, he moved first to TRW Inc. and then to Honeywell in 2002, where he is credited with leading a turnaround.

He also made the company more of a political player. Its political giving has grown. Roughly 60% went to Republicans and 40% to Democrats in the 2012 election cycle, according to the nonpartisan Center for Responsive Politics.

President Obama named Mr. Cote to the Simpson-Bowles deficit-cutting commission in 2010. The role, Mr. Cote says, impressed him with the depth not only of the country's fiscal but its political problems. Commission co-chairman Alan Simpson recalls a day after months of partisan warfare when Mr. Cote took off his coat and told the group: "Who are you people? Is this the way you do the nation's business? I'd fire all of you."

During the bitter fight over raising the debt ceiling in the summer of 2011, Mr. Cote signed a letter with about 450 other CEOs urging the president and Congress to compromise for the good of the economy. He says the effort fell flat without any follow-up. The debt fight helped set the stage for the fiscal cliff by dictating mandatory spending cuts in January 2013 unless a bipartisan "supercommittee" could agree on deficit reductions, which it couldn't.

This year, with fiscal uncertainty hanging over the economy, Mr. Cote took steps to protect Honeywell from economic weakness. He says he started letting 300 job openings go unfilled each month and cut capital spending 15%, allowing $5 billion to pile up in corporate coffers.

On July 17, he hosted a dinner at Honeywell's Washington office for Mr. Simpson, a former Wyoming GOP senator, and Erskine Bowles, the Democratic former White House chief of staff who co-led the deficit-reduction commission with Mr. Simpson. Also there was Sen. Mark Warner (D., Va.), who was an entrepreneur before running for office.

"How can CEOs make something happen?" Mr. Cote recalls asking. After hearing two hours of debate, he summed up: engagement, money and message. Mr. Cote said he would recruit fellow CEOs and ask each for $1 million in corporate donations to Fix the Debt.

Sen. Warner questioned whether he could accomplish that before Congress returned after the November election. "Mark, you're dealing with CEOs now," Mr. Cote says he replied. "It will be done by Friday."

Mr. Cote started recruiting the heads of big corporations. By week's end, he says, he had raised $12 million. It has since grown to about $43 million.

"Our role is pretty simple: to make sure that every political leader understands the consequences of the fiscal cliff," says Caterpillar Inc. CAT +0.24% CEO Douglas Oberhelman. "If solved, companies will pour jobs and capital into the economy; if not, our economy remains fragile."

Mr. Cote sought a message that would resonate with his peers. His answer: calling for a "market-credible" plan to cut $4 trillion over 10 years from what the national debt would otherwise climb to. "We liked Dave's term," Mr. Oberhelman says. "It shows that this budget deal must address the short and long term to the financial markets."

Once legislators returned after the election, Mr. Cote and the CEOs descended on the Capitol to meet with them. Mr. Cote was in demand by both parties.

When the president invited a few CEOs to discuss the fiscal cliff three weeks ago, the staff seated Mr. Cote directly across from Mr. Obama. Afterward, Mr. Cote did on-camera interviews on the North Lawn.

In late November he led an entourage of CEOs for a flurry of meetings on Capitol Hill. This time, the Republicans told him to deliver a message. Senate Republican Leader Mitch McConnell told him, "You need to tell the president that we're willing to do tax reform if he does significant entitlement reform."

On the House side, Mr. Cote chatted with Republican whip Mr. McCarthy in his office, where they bonded over their interest in history. Mr. McCarthy showed him a window that survived a fire set by the British during the War of 1812.

When they joined the CEO group for a meeting with Speaker Boehner, Mr. Cote observed that "there's a lot of money on the sidelines waiting to be invested," with some estimates of $1 trillion on corporate balance sheets that could be released if CEOs had certainty on the country's fiscal condition.

Some economists are skeptical. "CEOs aren't passing up profitable opportunities waiting for a fiscal deal," says Dean Baker, co-director of the liberal-leaning Center for Economic Policy and Research. He estimates that a new law would spur "modest" investment by U.S. companies of about $30 billion to $40 billion over the next year.

The CEO meetings in Washington got the attention of opponents on the left and right. Small-business groups such as the National Federation of Independent Business launched their own campaigns; some owners pushed for and got separate sessions with House Republicans, who criticized the president for holding a second meeting with big-company CEOs.

Liberal groups, including Campaign for Community Change and Social Security Works, protested outside a hotel where Fix the Debt held a conference last week. They called Mr. Cote "an odd choice for spokesman" with his "retirement assets of more than $78 million and his company's pension underfunded by $2.8 billion." (Mr. Cote says Honeywell's pension will be 85% funded at year-end, with company contributions of more than $5 billion since 2009.)

At the same time as Mr. Cote prods lawmakers to deal with the fiscal cliff, he and his executives are preparing for a possible tumble off it. At Honeywell's Morris Township, N.J., headquarters on Monday, Mr. Cote, wearing jeans and drinking Diet Mountain Dew, led his team through semiannual planning under the assumption there will be no deal and the automatic spending cuts will kick in.

"For months, we've been teeing up our businesses with that assumption," he says, in his office filled with Boston Red Sox mementos and hunting and fishing trophies.

Mr. Cote then flew back to Washington to press more politicians to act. But signs of frustration were starting to show. "Everything they need to know, they know," he said as he boarded a company plane. "I can keep talking about a market-credible fiscal plan…but it's time to say, 'You are the leaders—lead.' "

In Sen. Bob Corker's office, the Tennessee Republican told Mr. Cote that the unity among corporate leaders would evaporate when the "platitudes turn to specifics," particularly on tax changes. "At some point, the CEOs will become divided and fight each other," he said.

Mr. Cote stuck to his script: "If we keep putting the business community off, we wait, we don't invest, we cut jobs."

Through it all, Mr. Cote doesn't make a point of his party preference. One Republican senator suspects Mr. Cote is an independent. Democratic Sen. Baucus expressed surprise when he learned Mr. Cote is a Republican.

Mr. Bowles has urged Mr. Obama to put Mr. Cote in his cabinet for the next term, as Treasury or Commerce secretary. Mr. Cote says he plans to stay at Honeywell. Speaking of his fling with Washington politics, he says, "I can't wait to get out of here and back to my day job."