Obama's success: It's all about 2010

President Obama has said if the economy doesn't turn around on his watch, voters won't give him a second term.

"If I don't have this done in three years, then there's going to be a one-term proposition," he said in an NBC interview in February.

Policy experts agree Obama's presidency will be rated on the speed and depth of the economic recovery. But they think he may only have until mid-2010 to get the economy moving in the right direction before Americans start blaming him for what ails them.

"If we get back to an upward economy in 2010, it'll be good. But if we're in it [longer] ... people's opinions will be formed. That's as much patience as Americans will have," said Gary Clyde Hufbauer, Reginald Jones senior fellow of the Peterson Institute.

And voters could take it out on Democrats in the November 2010 midterm congressional elections.

"Republicans could cut into Democratic majorities," said American University Professor Allan Lichtman, a political historian and presidential election expert.

What specifically needs to happen by mid-2010? There needs to be clear evidence of a recovery, with unemployment back down around 8%, production up, foreclosures on the decline, and stocks higher. "Take your headlines today and flip the verbs," Hufbauer said.
0:00 /3:57Mixed grade on economic agenda

The economy has worsened since Obama took office. Indeed, he has said many times that things would get worse before they get better.

Economists are in two camps: those who are cautiously optimistic that the economy is poised for near-term recovery, and those who may concede the economy could be touching bottom but aren't convinced a bounce-back will occur soon.

Lakshman Achuthan, managing director of the Economic Cycle Research Institute, is in the optimists' camp for two reasons.

For one thing, despite a very sour economy, Obama has helped to boost confidence, which is an intangible necessity for recovery, Achuthan said. Second, the leading indicators he analyzes suggest the country may be at or very near a bottom -- and that could mean an economic recovery could begin over the next four months, he said.

Brian Bethune, chief U.S. financial economist of Global Insight, said he is also seeing data that suggest a trough may be near, but he is less certain a recovery is in the offing.

"You get a sense there's a breadth of things improving although not a depth," Bethune. "There's not enough to say there's a definite trough or beyond that a recovery."
Beyond economic recovery

While the pace of economic recovery may make or break Obama's chances for another term, his presidency will also be assessed on his ability to foster reform in terms of health care, Medicare, Social Security and energy.

Particularly when it comes to entitlement programs, the onus on Obama is "not to solve them but to turn the corner. That's all landmark stuff," Hufbauer said.

Administration officials and others make the case that the country's long-term debt problem will only be resolved once health care costs are brought under control. And the president wants to earmark $634 billion as a down payment on the cost of health care reform. He's also calling for that fund to be deficit neutral, meaning lawmakers will have to come up with ways to pay for it.

Budget hawks applaud his deficit-neutral stance on issues like health care reform and his vow to reduce the annual deficit by 2013. But they're not happy with the fact that his budget would start running it up again by 2019, under even optimistic economic forecasts.

"He's been saying a lot of the right things," said Marc Goldwein, policy director at the Committee for a Responsible Federal Budget. "[But] the numbers in his 2010 budget assume the economy recovers very quickly and the deficits in the out years are still very bad."

Last year, the public debt -- the sum of all annual deficits to date plus interest -- was 41% of GDP. Under Obama's budget it would jump to 67% by 2019, according to administration estimates, which may be revised this summer. The Congressional Budget Office, using different assumptions than the White House, estimates the president's budget will push public debt to 82%.

Those levels are considered unsustainable by some, but there is no hard-and-fast limit that defines sustainable.

Generally speaking, the more debt the government issues over time, the more likely it is to crowd out private investment in corporate bonds, slowing economic growth. And there's a greater the risk that the interest the government owes on its debt would grow at a faster rate than the economy.

"If we're permanently spending significantly more than we're raising that should be cause for concern," Goldwein said.

Of course, Obama is betting his presidency that running up debt to reform energy and health care now may be less expensive in the long run than not reforming them.

Stocks struggle higher

Stocks erased losses, mustering small gains early Tuesday after a stronger-than-expected consumer confidence report countered fears about the viability of U.S. banks and the potential economic impact of swine flu.

The Dow Jones industrial average (INDU) gained 20 points, or 0.3%, over an hour into the session. The S&P 500 (SPX) index gained 2 points, or 0.2%. The Nasdaq composite (COMP) gained 5 points, or 0.3%.

The April consumer confidence index rose to 39.2 from a revised 26.9 in the previous month. Economists surveyed by Briefing.com thought it would improve to 29.7.

Stocks had tumbled in the first minutes of trade, extending the previous session's selloff, as investors stepped back after the recent run. Stocks rallied for six straight weeks on bets that the worst for the economy has already happened, then seesawed last week as quarterly results began to pour.

This week investors have been keeping an eye on the banks and the latest reports on the swine flu outbreak.

Bank sector: Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) will need to raise more capital, according to initial government "stress tests," the Wall Street Journal reported. Regulators reportedly told the banks that they need to boost their reserves to prepare for a potential worsening of the economy.

Results of Treasury's tests of the largest U.S. banks aren't due until next week.

Bank of America shares fell 5%, Citi dropped 4% and the KBW Bank (BKX) sector index fell 1%..

Swine flu: Concerns about the economic impact of the swine flu outbreak remained in place Tuesday as health officials have confirmed at least 90 cases of the disease worldwide and 50 in the United States.

Economists are concerned that should the outbreak become a large-scale pandemic, it would throw off a global economic recovery attempt and even intensify the recession.

Economy: The S&P/Case Shiller 20-city home price index fell 18.6% in February from a year ago, extending the losing streak to 31 months. But it was the first time since October 2007 that the index didn't hit a record low in its year-over-year drop.

Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 2.93% from 2.92% Monday. Treasury prices and yields move in opposite directions.

Lending rates were mixed. The 3-month Libor rate fell to 1.04% from 1.05% Monday, according to Bloomberg.com. The overnight Libor rate was unchanged at 0.21%. Libor is a bank-to-bank lending rate.

Oil rises slightly

Oil prices rose slightly Wednesday as the stock market posted modest gains, despite a government report that showed crude supplies increased more than expected.

In its weekly inventory report, the Energy Information Administration said crude stocks rose 3.9 million barrels in the week ended April 17.

Analysts were expecting an increase of 3 million barrels, according to a consensus estimate compiled by Platts, an energy information provider.

Oil prices rose 30 cents to settle at $48.85 a barrel Wednesday.

"At this point, it's no secret we have a lot of supply," said Phil Flynn, analyst at Alaron Trading. "Oil is following the stocks (market) pretty consistently in recent weeks."

Stocks turned slightly higher Wednesday afternoon. Oil investors look to the U.S. stock market because crude is priced in dollars around the world.

The Dow Jones industrial average was up 63 points with around 45 minutes left in the session.

Oil prices were also boosted by the refinery utilization rate, which rose by 3 percentage points to 83.4% of capacity. Analysts expected 81.45%.

A higher run rate signals an expectation of more upcoming demand, Flynn said.

Gasoline: Stockpiles of gasoline jumped by 800,000 barrels, while analysts predicted a decrease of 860,000 barrels.

The national average price for a gallon of regular unleaded gasoline increased for the fifth consecutive day to $2.062, up from the previous day's $2.06, according to survey results released Wednesday by motorist group AAA.

That's down $2.052, or 49%, from the record high price of $4.114 in July.

The EIA report also said distillates, which are used to make heating oil and diesel fuel, increased by 2.7 million barrels. Analysts expected distillate supplies to fall by 1.25 million barrels.

Outlook: For the foreseeable future, oil prices will be "driven by the fortunes of the stock market," Flynn said.

Crude has hovered near both sides of the $50 mark, and it should rise amid mild but growing optimism about the economic recovery, Flynn said.

"Barring any major news, the stock market should creep higher on that optimism," he said. "And when the mood is better for stocks, the oil market is happy."

Stocks slip despite Citi, GE

Stocks slipped Friday morning as investors welcomed better-than-expected earnings from Citigroup and General Electric, and pulled back from a six-week advance.

The Dow Jones industrial average (INDU) lost 30 points, or 0.3% almost 90 minutes into the session. The S&P 500 (SPX) index lost 3 points, or 0.4%. Both had ended the previous session at more than two-month highs.

The Nasdaq composite (COMP) lost 15 points, or 0.9%, after ending the previous session at a more than five-month high.

Stocks, as represented by the S&P 500, have gained more than 26% in the past six weeks, on bets that the economy is closer to stabilizing. The gains followed a selloff that left the S&P 500 at a 12-1/2 year low. A rash of better-than-expected profit reports has helped sentiment this week.

Quarterly results: Citigroup (C, Fortune 500) reported a quarterly profit Friday morning, due to strength in its investment banking division. But after paying out preferred dividends, results amounted to a per-share loss of 18 cents. Nonetheless, that was smaller than the 34-cent per share loss analysts expected. Shares fell 8%.

JPMorgan Chase (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500) both reported weaker quarterly profit that beat estimates earlier this week. Last week, Wells Fargo (WFC, Fortune 500) forecast that it would report a $3 billion profit.

Fellow Dow component General Electric (GE, Fortune 500) reported weaker quarterly earnings that beat estimates on weaker quarterly sales that missed forecasts. Weakness in the company's finance unit countered mixed results at other divisions. Shares were little changed.

After the close, Google (GOOG, Fortune 500) posted quarterly earnings that rose from a year ago and topped estimates on revenue that rose from a year ago but was shy of forecasts. Shares rose 1% Friday morning.

Economy: The April consumer sentiment index from the University of Michigan rose to 61.9 from 57.3 in March. Economists surveyed by Briefing.com thought the index would rise to 58.5.

Bonds: Treasury prices fell, raising the yield on the benchmark 10-year note to 2.87% from 2.83% Thursday. Treasury prices and yields move in opposite directions.
0:00 /02:39Life in the pits

Other markets: In global trading, Asian markets ended higher. European markets rallied in afternoon trading.

In currency trading, the dollar gained versus the euro and fell against the yen.

U.S. light crude oil for May delivery rose 29 cents to $50.27 a barrel on the New York Mercantile Exchange.

COMEX gold for June delivery fell $11.40 to $868.40 an ounce.

Recovery hopes begin to blossom

Unemployment at a 25-year high. Housing prices continuing to fall. Corporate titans such as General Motors on the brink of bankruptcy. There's no lack of bad economic news.

And yet, amid the gloom, there are a growing number of economists that see a recovery on the horizon -- perhaps even a strong rebound.

They say that a number of indicators appear to have bottomed out in recent months. Job losses may have peaked in January. Home sales are starting to pick up. Stocks are enjoying a strong rally.

And because the economy has experienced such a steep decline in the current downturn, some economists are hopeful the recovery ahead will be much stronger than the anemic gains that came about after the end of the previous two recessions.

Lakshman Achuthan, managing director of Economic Cycle Research Institute, said the economy could be as close to four months away from a recovery.

He says his firms' readings on long-term and short-term economic indicators give him significantly more hope that the economy is closer to a turnaround than he had thought even a month ago. Among the more than dozen different things his firm looks at are home prices, the jobs picture and stock prices.
0:00 /4:50First inning of recovery?

"These readings don't really turn unless something is happening," he said.

To be sure, many economists still think that the recession won't end until much later this year, if not 2010. But Mark Zandi, chief economist of Moody's Economy.com, also believes that a recovery could be closer than most people think. However, he said an end to the recession will largely depend on improvement in the labor markets.

"We're starting to see some pent up demand for goods. But first things first, we need to see job losses moderate," he said.

Zandi said just a slowing rate of job losses should help make people more confident about their own job outlook, as will a continuation of the recent gains for stocks.

Those two factors, plus a sign that home price declines have ended will help to turn around consumer confidence, Zandi said. That should help spur more spending.

Zandi said the problem with confidence today is that when things aren't going well, many people can't picture things getting better, just as they have trouble imagining declining prices of homes and stocks during a boom period.

"Confidence is a very fickle thing. It can go from abject pessimism that pervades now to a more balanced view of the world rather quickly," he said.

Robert Brusca of FAO Economics, also believes there will be a fairly sharp recovery, mainly because this recession was so much worse than the ones in 1991 and 2001.

A slow, jobless recovery took place after those recessions, which were both fairly mild by historical standards. But the economy has often bounced back sharply following more severe recessions.

Brusca points out that, prior to the 1991 and 2001 downturns, the nation's gross domestic product has gained about 7%, on average, during the first year of a recovery.

For this reason, he is predicting strong growth in at least one of the year's final two quarters as well as a quicker return to health for the labor market.

"You've lost 5 million jobs. It shouldn't be hard to put 2.5 million jobs back on rather quickly after you hit bottom," he said.

Joseph Carson, chief economist at AllianceBernstein, said the economy is already showing early indications of turning around. In addition to improving home sales and positive signs from the stock and bond markets, retail sales in February and March were stronger than expected.

And all of this has happened before the nearly $800 billion stimulus package that was enacted earlier this has had much of an effect. Because of this, Carson said the stimulus plan could create stronger than expected growth -- and much sooner than consensus forecasts.

"Stimulus has a much better chance of working if trends are already turning up than if it needs to halt a decline," he said.

Treasurys fall after jobs report

Treasurys edged lower Friday morning after the government reported that unemployment rose to a 25-year high.

The Labor Department said the economy lost 663,000 jobs in March, after a loss of 651,000 jobs in February. The unemployment rate rose to 8.5% - its highest level since November 1983.

March's tally was worse than the 658,000 job loss predicted by a consensus of economists surveyed by Briefing.com. But many analysts were expecting the report to be even worse.

The jobs report is a closely watched indicator of economic health. Bond prices typically rise when the economic outlook darkens as investors shy away from more risky assets.

But investors are also concerned that the supply of Treasurys will outpace demand as the government issues record amounts of debt to fund its economic rescue efforts. Bondholders are also worried about inflation, which erodes the value of fixed income assets.

Kevin Giddis, managing director of fixed-income at Morgan Keegan, said the market is approaching an "inflection point" where investors, concerned about rising inflation, no longer flock to Treasurys in response to signs of economic weakness.

"I wouldn't necessarily want to be short Treasuries yet," Giddis wrote in a research note. "But the longest-running flight-to-quality trade may be finally running out of steam."

Bond prices: The benchmark 10-year bond slipped 6/32 to 99 21/32, and its yield rose to 2.79% from 2.76% Thursday. Bond prices and yields move in opposite directions.

The 30-year long bond fell 1/32 to 98 6/32, and its yield rose to 3.6% from 3.59%.

The 2-year note slipped less than 1/32 to 99 31/32, and yielded 0.9%.

The 3-month yield held at 0.21%.

Lending rates: The 3-month Libor rate was 1.16%, down from Thursday's level of 1.17%, according to Bloomberg.com. The overnight Libor rate slipped to 0.27% from 0.29%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges narrowed Friday. The "Ted" spread fell to 0.95 percentage points from 0.96 points on Thursday. The narrower the Ted spread, the more willing investors are to take risks.

The Libor-OIS spread slipped to 0.94 percentage points from 0.95 points. The narrower the spread, the more cash is available for lending.

Stocks make it a 3-day rally

Stocks rallied Thursday afternoon after regulators changed an accounting rule that critics say exacerbated the financial sector crisis, and by extension, the recession.

The G-20 meeting of the world's leading economies was also on the radar.

The Dow Jones industrial average (INDU) closed with a jump of 216 points or 2.8%. The Dow had risen as much as 314 points during the afternoon, topping 8,000 for the first time during a session since Feb. 9.

The S&P 500 (SPX) index gained 23 points, or 2.9%. The Nasdaq composite (COMP) added 51 points, or 3.3%.

Stocks surged Thursday after the Financial Accounting Standards Board (FASB) voted to change the "mark-to-market" accounting rule.

The rule requires banks to value so-called bad debt on their balance sheets based on the fire sales of similar assets at other banks and critics say it exacerbated the financial crisis. Supporters say it is the only way to fairly account for the bad debt. (Full story)

J. Stephen Lauck, president and CEO at Ashfield Capital Partners, said that the change in the accounting rule had been expected, but it was still a big positive for sentiment.

"The change in the rule is driving the advance today, along with the continuation of data points that show things are getting less bad and in some ways stabilizing," Lauck said.

Equities have been rising on bets that the worst has already happened and that some of the government's efforts to stimulate the economy and aid the financial sector will help.

Stocks rallied Wednesday on the first day of the new quarter, building on the big March run-up. Since hitting a 12-1/2 year low on March 9, the S&P 500 has rallied 23% as of Thursday's close.

After several attempts at "bottoming" failed last autumn, analysts remain wary of saying that the recent advance is more substantial than a rally within a longer bear market.

"It's hard to say whether it's a bear market rally or the real thing," said Mike Stanfield, CEO at VSR Financial Services. "But what's encouraging is the fact that the financials have led us off the bottom this time."

He said that this factor was critical because the stock market can't make a strong comeback without the financial sector taking the lead.

On Friday, investors will take their cue from the government's March jobs report, due out before the start of trade. Employers are expected to have cut 658,000 jobs from their payrolls after cutting 651,000 in February. The unemployment rate, generated by a separate survey, is expected to have risen to 8.5% from 8.1% in February.

The Institute for Supply Management releases its services sector index for March after the start of trade. Also, Federal Reserve Chairman Ben Bernanke speaks in the afternoon about the Fed's balance sheet at a symposium in North Carolina.

G-20: Investors also kept an eye Thursday on the G-20 meeting in London, which brought together leaders from the world's largest economies. The group pledged more than $1 trillion to boost the International Monetary Fund and also agreed to more closely monitor the global financial system. (Full story)
0:00 /02:39Life in the pits

Stock movers: A variety of stocks gained, including financial shares such as Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and Goldman Sachs (GS, Fortune 500).

But the gains were broad-based, with all but three of the Dow 30 rising, led by IBM (IBM, Fortune 500), McDonald's (MCD, Fortune 500), 3M (MMM, Fortune 500), Procter & Gamble (PG, Fortune 500) and United Technologies (UTX, Fortune 500).

A nearly 9% spike in oil prices gave a boost to the Dow's oil components, Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than 7 to 1 on volume of 1.87 billion shares. On the Nasdaq, advancers topped decliners by more than three to one on volume of 2.83 billion shares.

Economy: The number of Americans filing new claims for unemployment rose to 669,000 last week from a revised 657,000 in the previous week, topping economists' forecasts.

Continuing claims, a measure of Americans receiving benefits for a week or more, rose 161,000 to 5.7 million, the highest reading since the Labor Department started keeping records in 1967.

February factory orders rose 1.8%, the Commerce Department said, versus expectations for a rise of 1.5%. Orders fell 3.5% in January.

Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 2.77% from 2.65% Wednesday. Treasury prices and yields move in opposite directions.

Lending rates mostly dropped. The 3-month Libor rate dipped to 1.17% from 1.18% Wednesday, according to Bloomberg.com. The overnight Libor rate fell to 0.29% from 0.3% Wednesday. Libor is a bank-to-bank lending rate.

Other markets: In global trading, Asian and European markets rallied.

In currency trading, the dollar fell versus the euro and the yen.

U.S. light crude oil for May delivery jumped $4.25 to settle at $62.54 a barrel on the New York Mercantile Exchange, a jump of 8.8%.

COMEX gold for June delivery fell $18.80 to settle at $908.90 an ounce.