Jobs Data Suggest Improvement Overall

The economy grew at a slow 1.3 percent in the first six months of the year, but private sector jobs data for July hold out hope for an improved second half.

GDP for the second quarter grew at 1.7 percent, well above the consensus 0.9 percent. But a downward revision for the first quarter, to 1.1 percent from 1.8 percent, chilled some optimism that the second half will break out to the 2 percent to 3 percent growth level many economists expected.

However, ADP's payroll report showed a jump in private sector payroll growth to 200,000, from the 188,000 reported last month. Economists follow ADP as a precursor to the government jobs report, and it may influence some economists' forecasts, though it has been either higher or lower than the actual jobs report by an average 40,000 a month this year.

"The economic growth since last year has been very disappointing, largely because of the fiscal drags from tax increases and spending cuts, sequester, but it hasn't translated into weaker jobs growth," said Mark Zandi, chief economist with Moody's Analytics. "Businesses appear to be looking through the fiscal headwinds, which is very encouraging and suggests that as those headwinds fade later this year, GDP growth and jobs growth will accelerate."

Zandi said he is convinced that the second half will rebound to a growth rate of 2.6 percent because of the consistent job growth in the first half, which averaged about 200,000 a month, according to government jobs data. He expects to see 185,000 nonfarm payrolls in July when the government data is released Friday.

Markets reacted mixed, with the dollar moving higher and bonds selling off. Stock futures retreated as traders reacted to a sharp jump in interest rates. The drama was in the bond market, where the 10-year yield jumped to 2.7 percent after the ADP jobs number, before slipping back to 2.66 percent when GDP was released 15 minutes later.

When stocks opened, the market moved higher and bond yields remained elevated, with the 10-year flirting with that 2.7 percent level. In late morning trading the Dow moved sharply higher, to a new record.

"The bond market is responding as it should to tightening," said Peter Boockvar, chief market analyst at the Lindsay Group. "The stock market is still deciding between on the one hand, if the job market is better, earnings will be better, and on the other hand, it's tough to ignore this move higher in interest rates."

This comes against the backdrop of the Federal Reserve Open Market Committee's meeting, which ends with a statement later Wednesday. While the Fed is not expected to use its 2 p.m. ET statement to deliver any new messages, traders are watching to see if it will say anything about paring back its $85 billion bond purchases. Tapering of the program is widely expected to begin in September if economic data are strong enough.

"This is a conundrum for the Fed: Is the jobs gain going to lead to second half improvement?" Boockvar said. But the risk is a slow-moving economy crimping further jobs gains, and Friday's July jobs report will be key. "If we're getting 200,000 jobs three months in a row, the Fed may lean more toward that and put their chips on a second half recovery," he added.

The GDP data come with a major revision in the way the government calculates GDP. Research and development costs, for instance, will now be counted as investment. The data also take into account a new way to calculate intellectual property so that Hollywood now counts as investments spending on movies and some other programming.

One result was a major revision to 2012 GDP. The first quarter showed a sharp gain, and the fourth quarter showed hardly any growth, but overall growth for the year moved up to 2.8 percent from 2.2 percent.

For second-quarter 2013, the government said, the acceleration came from increases in nonresidential fixed investments, higher exports and a smaller cut in federal spending. There was also in increase in state and local government spending. These things partly offset a rise in imports and a drop in private inventory investment and personal consumption expenditures.

"The gaps in the data are related to the data," Zandi said. "The revisions will close the gap, but more positively I do think businesses are now looking at the glass as half-full as opposed to half-empty and are willing to look through current weakness in growth and sales and continue to hire and that is encouraging."

Zandi said the key is the housing market and whether it can continue to rebound. His expectation for improved growth comes on the back of a pickup in housing and construction.

"I think the Fed's got it right. They can manage this," he said. "The threat is they can't manage this and bond yields rise too far, too fast."

"It's a battle right now between economists and bond traders. ... And I'm sticking with the economists," he said.

The GDP benchmark revisions are the first in five years. The changes go back to 1929, and the government said that for the 1929 to 2012 period, average annual growth rate of real GDP was 3.3 percent-0.1 percent higher than previously estimated.

For the more recent period of 2002 to 2012, the growth rate was 1.8 percent-0.2 percentage points higher. In that period, the rate of change in prices paid by Americans was 2.3 percent, 0.1 percent less than prior estimates.

Mortgage Applications
Continue Decline

The recent rise in interest rates is continuing to work its way through the mortgage market. The Mortgage Bankers Association said yesterday that its mortgage applications index fell by 1.2% over the past week and is now at its lowest level in more than two years. It's off by 47% since its May high.

The vast majority of the deterioration is a function of a dramatic decline in demand for refinance mortgages, which, for obvious reasons, are particularly sensitive to higher interest rates.

"Refinance application volume continues to decline," said Mike Fratantoni, MBA's vice president of research and economics, "with the refinance index now more than 55 percent lower than its recent peak, reaching the lowest level in over two years."

Meanwhile, applications for purchase-money mortgages sank by 2% on a seasonally adjusted basis. But while the associated index is at its lowest level since February, down 14.7% from the high in the first week of May, it's nevertheless 3.5% higher than it was at this time last year. The year-over-year growth is consistent with this summer's marked pickup in pending home sales.

While statistics like this may, at first glance, appear to be an ominous sign for the housing industry, the reality is more nuanced. We saw this in the earnings announcements of the nation's largest mortgage originators Wells Fargo and JPMorgan Chase, which reported increases in purchase-money mortgage origination volumes of 46% and 44%, respectively, during the second quarter.

Meanwhile, the nation's largest homebuilder, D.R. Horton, said last week that new home orders in the second quarter improved by 12% over the same time period last year and that deliveries were up by 30%. But on the same day, the nation's second largest builder, PulteGroup, acknowledged that, while its deliveries also increased, its new orders fell by 12% on a year-over-year basis.

At the end of the day the data casts little doubt on the fact that the housing market is indeed in the midst of a robust recovery. Yet, as we've seen over the last few weeks, there's no reason to think that the recovery will be without periodic interruption.

Fed Maintains Easy-Money Policy

The Federal Reserve agreed this week to continue its extraordinary bond-buying program to hold down borrowing costs for consumers and businesses, though many economists expect the stimulus to be scaled back this fall.

The Fed is buying $85 billion a month in Treasury bonds and mortgage-backed securities to contain long-term interest rates and spur more home purchases and other economic activity.

Last month, Fed Chairman Ben Bernanke said the central bank likely would begin paring back the monthly purchases later this year and end them by mid-2014 if the economy and labor market continue to improve.

His remarks initially roiled financial markets, but stock rebounded and bond yields edged lower in recent weeks after Bernanke said reduced bond purchases don't mean an earlier increase in the Fed's benchmark short-term interest rate. Most Fed policymakers expect that rate to stay near zero until 2015.

Bernanke also has said a pull-back in the bond-buying would be put off if the economy and job market teeter over the next few months amid federal budget cuts and a January increase in payroll taxes.

Economic growth slowed in second quarter as industrial output dipped and orders for certain long-lasting goods such as refrigerators and mobile phones were stagnant.

Still, payrolls have grown solidly this year and the housing and auto markets have continued a strong recovery. Most economists recently surveyed by USA TODAY expect the Fed to begin to trim the bond purchases in September or October.

Medicare Premiums to Remain Stable in 2014

Medicare Part D premiums will average about $31 in 2014 — up from $30 for the past three years.

The Part D deductible will fall from $325 to $310 in 2014.

"There is continued very strong competition within the Part D plan," said Jonathan Blum, deputy administrator and director for the Center of Medicare. When the coverage gap program began, "there was lots of concern that filling in the doughnut hole would cause Part D costs to go up."

Instead, Blum said a transparent bidding process and competition among private insurers participating in the program kept costs low.

This follows news that more than 6.6 million people with Medicare have saved more than $7 billion on prescription drugs as a result of the gap coverage, or an average of $1,061 per beneficiary. The administration also announced this week that Medicare spending was the lowest it had been in 50 years.

"I think on the Medicare side, we are pretty proud of the story right now," Blum said.

The government has bargained for drug discounts through the pharmaceutical industry. When someone reaches the "doughnut hole," or the area after traditional coverage ends and before catastrophic coverage begins, they may purchase their medications at a deep discount.

In 2013, drugmakers agreed to give the government a 52.5% discount on premium drugs and 21% on generic drugs to participate in Medicare in 2013, and the government will pass the savings to seniors. In 2013, the gap, or doughnut hole, starts when a person's Part D initial coverage reaches $2,970. The law closes the gap by 2020.

However, the government's Medicare cost watchdog, while generally positive about the Part D program, has cautioned that discounts for name-brand drugs could trigger higher spending. The Medicare Payment Advisory Commission in its March report found that Medicare's reinsurance payments are the fastest-growing component of Part D spending, and that closing the coverage gap "likely contributed" to higher growth between 2010 and 2011. They expected an increase of 14% between 2012 and 2013 for reinsurance.

Much of the reinsurance costs come because of higher-cost specialty drugs, such as cancer treatments, that are not available as generics, Blum said, adding that Part D enrollees have a high rate of generics use.

According to MedPac, Medicare subsidizes 80% of drug spending beyond the catastrophic coverage threshold as a form of risk adjustment for insurers for higher-cost enrollees.

Critics of the law, including the libertarian Cato Institute, have argued that the half-off savings for brand-name drugs would encourage seniors to use those medications, rather than generic drugs, and therefore cost the government more money. HHS reports that the program saved seniors $2.5 billion on brand-name medications and only $105 million on generics. However, the majority of seniors who reach the doughnut hole use name-brand drugs, while those who use generic medications tend not to reach that gap.

Seniors who reach the catastrophic coverage area may ultimately be better for the program because when people take their medications as prescribed, they're less likely to need to be hospitalized or to have their conditions worsen on a long-term basis, Blum said.

MedPac also found there was a slowdown in the number of enrollees — from 30% to 28% — who entered the coverage gap after the law was enacted. The report and Blum said insurers have expanded their coverage to enrollees as a way to compete. The law requires 26% gap coverage, but the plans are providing as much as 34% coverage.