Booming Economy? US Treasury Can’t Pay It’s Bills, (#GotBitcoin?)
Agency urges Congress to act promptly to raise the federal borrowing limit.The U.S. government risks not being able to pay its bills on time later this summer or fall unless Congress acts to raise the federal borrowing limit, the Treasury Department said Wednesday. Booming Economy? US Treasury Can’t
Congress voted in February 2018 to suspend the debt limit until March 1.
After that the Treasury was no longer able to tap bond markets to raise new cash and began relying on extraordinary measures to continue making on-time payments to bondholders and other federal benefit recipients, such as retirees and veterans.
Officials said Wednesday they expect to exhaust those measures “sometime in the second half of 2019.”
“It is critical that Congress act to increase the nation’s borrowing authority, and Treasury urges Congress to act promptly on this important matter,” Brian Smith, Treasury’s deputy assistant secretary for federal finance, said Wednesday in a statement on the government’s borrowing needs.
In projections issued earlier this week, the Treasury said it expects to end the third quarter with $85 billion in cash, a much lower balance than it typically maintains, as it bumps up against the debt ceiling.
The figures suggest the government may run out of money to keep making payments in full and on time at the end of September or early October, in line with projections from independent analysts.
“Having only $85 billion on hand would be a reckless and irresponsible position for the U.S. government to find itself in, as that figure represents no more than an average week’s worth of federal spending,” Shai Akabas, the director of economic policy for the think tank Bipartisan Policy Center, said this week. “These new projections from the Treasury Department should be eye-opening for policymakers and the public alike.”
Overall, the Treasury is scaling back its borrowing needs, which ramped up last year amid higher government spending, a $1.5 trillion tax cut and a shrinking Federal Reserve portfolio.
The Treasury said earlier this week it expects to issue $30 billion in debt in the second quarter, and $160 billion in the third quarter—less than half of what was issued in the same period a year earlier.
They agency said it would continue to implement previously announced changes to auctions for TIPS—Treasury inflation-protected securities—but said it expected no increases to nominal coupon and floating-rate note auction sizes for the remainder of 2019.
The Treasury began gradually adjusting the size of its nominal coupon and two-year auction sizes last year to respond to increased borrowing needs, due in part to the Fed’s move to shrink the size of its $3.9 trillion asset portfolio.
Fed officials agreed in March to slow the pace of balance sheet reduction beginning this month, and to end the runoff of their Treasury holdings by October.
Officials earlier this year debated when to allow the portfolio to start growing again, but didn’t reach any conclusions. The Fed’s rate-setting committee is wrapping up a two-day policy meeting in Washington Wednesday, and Chairman Jerome Powell is set to hold a postmeeting press conference at 2 p.m. ET.
CBO Sees National Debt Continuing To Grow
The federal debt estimated to grow to 92% of gross domestic product in 2029 from 78% in 2019, according to the Congressional Budget Office
The U.S. continues to be on a path to an expanding national debt, the Congressional Budget Office said Thursday, in a report that largely repeated its earlier budget projections.
The federal debt will grow to 92% of gross domestic product in 2029 from 78% in 2019, the largest projected share since 1947, said CBO, Congress’s nonpartisan scorekeeper. Almost half of that increase comes from higher interest rates projected by the agency. CBO estimates that the average interest rate on the government’s debt will go from 2.3% last year to 3.5% in 2029.
The Congressional Budget Office projects the country’s debt, measured as a share of gross domesticproduct, will continue to climb.
Annual deficits will average around 4.3% of the economy between 2020 and 2029, the agency said, well above the 2.9% average that prevailed between 1969 and 2018. The agency also expects revenues to rise sharply after 2025 once the individual income tax cuts of the 2017 tax overhaul expire. If Congress decides to extend those tax cuts, revenues will be lower.
The U.S. economy grew at a 3.2% rate annually from January through March, the strongest rate of first-quarter growth in four years.
Some prominent economists are reconsidering the country’s approach to budget deficits. Recent research has suggested that high government debt is less of a problem now that interest rates are projected to remain below the rate of economic growth for the foreseeable future. In the past, economists had warned that high debt levels would push up rates, which could topple the economy into recession. That looks less likely today, according to the new research.
Thursday’s CBO report briefly touched on that question. Even if interest rates remain below the rate of economic growth, it said, the size of the government’s annual deficit would be so large that it would more than offset the fiscal benefit of a growing economy and continue to push up the country’s overall debt load.
“If the average interest rate did not change, primary deficits would have to average less than 1.0 percent of GDP—significantly less than the 1.7 percent that we project they would average under current law—to keep debt from rising as a share of GDP,” said CBO Director Keith Hall in a statement.
As Retiree Health-Care Bills Mount, Some States Have A Solution: Stop Paying
Local governments are testing how far they can reduce health benefits for their retirees.
North Carolina corrections official Charles Johnson will soon lose a major perk he can offer recruits when the state ends a promise to pay health-care bills once workers retire.
“It’s going to make a difficult situation even more difficult,” said Mr. Johnson, an assistant superintendent at Polk Correctional Institution in Butner, N.C. About 30% of the facility’s roughly 335 correctional-officer positions are currently empty, he said.
States across the U.S. are testing how far they can reduce health benefits for their retirees as a way of coping with mounting liabilities and balancing budgets.
The cuts are a response to dramatic increases in medical costs, budget shortfalls and the introduction of new accounting rules forcing governments to be more public about how much they owe. Officials also face fewer legal hurdles to cutting retiree health benefits than they face with public pensions, which enjoy ironclad legal protections in many states.
North Carolina, which will end future-retiree health-care coverage for new workers hired in 2021, is not the only state to take more drastic measures. Kansas is now asking retirees to pay the full cost of their health care, pushing their monthly premiums to as much as $1,000. In Iowa, the state last year capped the contribution its flagship university makes to retirees’ health care, cutting the liability by $465 million.
U.S. states as a group have promised hundreds of billions more in retiree health benefits than they have saved up. The gap for so-called post-employment benefits, which mainly consist of retiree health care, amounts to roughly $600 billion, according to government data compiled by Eaton Vance Corp. That is on top of the $1.4 trillion states need to pay for promised pension benefits, according to The Pew Charitable Trusts.
“A lot of them didn’t realize how much they promised,” said Dan Levin, a senior vice president at Segal Consulting, which serves as the actuary for many cities and states.
Paying a portion of employees’ health-care bills once they retire became a benefit widely offered to public workers in the second half of the 20th century, according to the National Association of State Retirement Administrators. The value of these obligations accelerated along with increases in medical costs and the aging of the American workforce.
State and city governments increasingly began looking to cut these costs as they struggled following the 2008 financial crisis. In Detroit and Stockton, Calif., officials agreed to reduce their support for retiree health care as a way of negotiating their exits from municipal bankruptcy protection in 2014 and 2015, respectively.
“You go to the low-hanging fruit before you go to the stuff that’s harder to get to,” said Marcia Van Wagner, an analyst for Moody’s Investors Service.
Accounting changes also forced states to re-examine their support for these obligations. New Governmental Accounting Standards Board rules imposed between 2006 and 2008 prompted many to measure their retiree health-care obligations for the first time. Then, last year, the same board dictated that governments must report these liabilities prominently in their annual financial statements rather than relegate them to footnotes.
Governments have taken a variety of approaches to chipping away at their liabilities. Over the past decade, states including New Jersey, Michigan, Connecticut, Kentucky and Texas have made changes such as reducing benefits, increasing premiums and fees and tightening eligibility requirements, according to state officials and the National Association of State Retirement Administrators.
Some states are getting even more aggressive. The Kansas Health Care Commission decided to charge retirees the full cost of coverage beginning in 2017. The monthly cost for the approximately 2,000 retirees enrolled jumped by hundreds of dollars, and three-quarters of them dropped out, according to the state’s acting secretary of administration, Duane Goossen. But Kansas’ retiree health-care liability fell to $508,000 from $6.1 million.
In North Carolina, state officials in 2011 increased the premiums for one of the state’s retiree plans and then in 2017 went deeper by ending the benefit altogether for new employees starting in 2021. The 2011 cut sparked a lawsuit from retirees but an appeals court decided in the state’s favor. The plaintiffs have appealed to the North Carolina Supreme Court.
Mr. Johnson, the assistant superintendent for Polk Correctional Institution, said he worries that ending retiree health care will spark workplace conflict. He said he went to work for the state in 1992 after leaving the U.S. military in part because his parents, both county workers, advised him to look for a public-service job that came with retirement benefits.
“You have half your staff that has a benefit and another half that doesn’t have it,” he said.
North Carolina Treasurer Dale Folwell said ending the benefit will help stabilize the state’s finances and ensure corrections officers continue to have affordable health care available to them while employed. North Carolina’s $28.5 billion unfunded retiree health-care liability is among the highest in the nation.
“It’s not emotional and it’s not political. It’s mathematical,” Mr. Folwell said.
Dealership Pivot From New Vehicles To Used Car Sales
Auto retailer stocks are up 33% year-to-date, outpacing the S&P 500, as firms boost used-car operations and service departments.
Stock prices for the nation’s publicly traded dealership groups have rallied in recent months, a sign of Wall Street’s greater confidence in the ability of auto retailers to weather an expected downturn in the U.S. car market.
With showroom sales slowing, dealerships are pivoting to more reliable income generators, such as profits produced by their used-car operations and service departments, to offset declining margins in the new-car business, say analysts and dealers.
The Federal Reserve’s move in March to keep interest rates steady also has helped boost auto retailers’ stock performance. Dealerships rely on low interest rates to make it less expensive for them to build up their inventory and for their customers to take out loans to make purchases.
Five of the six publicly traded dealer groups reported surprisingly strong first-quarter results last week, beating analysts’ expectations. Lithia Motors Inc. reported earnings per share of $2.44, which beat analysts’ expectations by 28 cents, while Asbury Automotive Group Inc. beat expectations by 27 cents.
The stock prices of the six firms have risen an average of 12% since the first of them, Asbury, reported on April 23, according to data provided by FactSet.
Auto retailer stocks overall are up 33% year-to-date, outpacing the S&P 500 18% gain in 2019, according to FactSet data. The sector’s stock performance has also beat the major car companies, whose average share price was up 16% year-to-date.
David Whiston, an auto analyst for Morningstar Inc., said car dealers are benefiting from strong profits in their parts and service business, which helps buffer against a slowdown in new-vehicle sales because owners often service their cars years after a purchase. Used-car sales, which typically have higher margins than new, are also helping to boost profitability, dealers say.
“People have underestimated the power of the parts business,” Mr. Whiston said. “Dealers have also neglected used vehicles but now they all have stand-alone used-vehicle stores.”
Still, car dealers are facing mounting challenges to their business model, which is more than a century old and is heavily dependent on selling new vehicles. U.S. demand for new cars and trucks is cooling after more than a half-decade of uninterrupted growth and the rise in internet shopping is pinching new-vehicle margins because buyers generally walk into a dealership educated on what price they want to pay.
Car dealers are also grappling with the looming threat of ride-hailing services that could reduce the need to buy a vehicle, as well as new competition from online used-car buying sites, such as Carvana Co. and Shift Technologies Inc., that allow shoppers to skip a dealership altogether.
Until this year, auto dealer stocks have generally underperformed the broader market recently. Over the past five years, the stock prices of publicly traded dealer groups increased 9%, according to FactSet. The S&P was up 56% during that same period.
“We have a cautious view on this group moving forward,” said Ali Faghri, an analyst who covers auto dealers for Guggenheim Partners LLC. He said while their stocks are performing well now, they are still trading at very low valuations. Stiffening competition in the used-car market and increased price transparency on the internet will continue to weigh on profitability going forward, Mr. Faghri said.
Dealers are also bracing for growth in electric-vehicle sales, which could dent revenue on their service and parts business, analysts say. Electric cars typically require less maintenance than traditional gasoline-powered vehicles because they have fewer parts.
Auto executives are trying to respond to the shifting retail landscape by opening new stand-alone used-car dealerships and investing in new online initiatives that allow customers to complete more of the car-buying process on the internet. Dealers are also relying more on the services sold through the finance office— such as extended warranties and insurance for dings and dents to the car’s body—for profit growth.
AutoNation Inc., the U.S.’s largest dealership chain, has rolled out a new line of parts and accessories and opened its own collision centers and auto auctions, aiming to boost revenue outside its traditional car-selling business.
Some of these efforts are starting to yield results, dealers say.
While AutoNation’s net income declined 2% to $92 million in the first quarter, it increased its margins for both new and used vehicles. Chief Executive Carl Liebert attributed the strength in the quarter to the company’s efforts to grow outside its new-car department.
“We’re going to double down and execute our strategy,” Mr. Liebert said.
Sonic Automotive Inc. posted net income of $42.2 million in the first quarter, compared with a loss of $2.2 million in the prior-year period. The latest results were driven by improving performance from its EchoPark stand-alone used-car chain, which it launched five years ago, as well as profits from its financing business.
Group 1 Automotive Inc. said for the first time in its history, used-vehicle sales surpassed new-vehicle sales in the quarter, contributing to an 8% net income increase. Penske Automotive Group Inc.’s net income fell 8% in the quarter but it increased revenue from its service and parts business.
Mr. Whiston said the mounting threats to the dealership business model are already getting priced into their stocks. “There have been a lot of fears for a while now,” he said.
Apple’s iPhone Revenue Drops 17%
Overall revenue and profit decline, though results exceed expectations; shares climb in after-hours trading.
Apple Inc. posted its first back-to-back drop in quarterly sales and profit in more than two years, but the tech titan reported strength beyond its struggling iPhone business and said a sharp downturn in China showed signs of easing.
Profit dropped 16% to $11.56 billion for the three months through March 30, while revenue slid 5% to $58.02 billion, Apple said Tuesday.
Sales of the iPhone, long the biggest driver of its business, fell 17% to about $31 billion—an accelerated decline for a product that has been hobbled by smartphone owners holding on to devices longer and by competition from rivals in China offering lower-price, feature-rich handsets.
The company’s results exceeded analysts’ expectations, which had ebbed following a surprising slump in the previous quarter. Chief Executive Tim Cook highlighted glimmers of hope in problem areas including China, where he said customers have reacted positively to Apple’s move to lower iPhone prices and offer financing programs.
“Looking back at the past five months, November and December were the most challenging, so this is an encouraging trend,” Mr. Cook said. “We like the direction we’re headed with the iPhone, and our goal now is to pick up the pace.”
Apple said it expects revenue in the current quarter of between $52.5 billion and $54.5 billion, above consensus expectations.
Apple also blunted the damage from its iPhone business by extending the robust growth of services like app sales and streaming-music subscriptions, which collectively jumped 16%. It also said it would add $75 billion to its continuing share-buyback program.
Booming Economy? US Treasury Can’t
Shares of Apple surged about 5% after-hours, after falling in regular trading. Through Tuesday’s close, Apple’s stock was up about 27% this year, recouping most of the losses it racked up in the final two months of last year. Its market value is on course to once again top $1 trillion.
Tuesday’s report followed a mixed bag of quarterly results from tech giants, including a major stumble by Google’s parent company Alphabet Inc. that caused its stock to plunge nearly 8% on Tuesday, its worst decline in more than six years.
Both the digital-advertising giant and e-commerce giant Amazon.com Inc. over the past week reported their slowest revenue growth in four years as their core businesses showed signs of maturity. Microsoft Corp. , meanwhile, topped $1 trillion in market value at Tuesday’s close for the first time after reporting strong earnings last week.
The iPhone’s woes have threatened to define one of the weakest years in Mr. Cook’s tenure. In January, Apple reported its first decline in revenue and profit for the holiday quarter. It last experienced consecutive quarterly declines in 2016 amid weak demand for the iPhone 6s, which offered limited improvements over preceding models—much like this year’s iPhone XS and XR. Booming Economy? US Treasury Can’t
Mr. Cook has combated the adversity with a new strategy: expanding Apple’s services business and increasing the price of its gadgets. In March, it announced new subscription services for original TV shows, videogames and magazines, as well as a credit card. It raised prices late last year on iPads, helping it increase sales 22% in the latest quarter even as analysts estimate shipments remained flat.
Mr. Cook also highlighted success—especially in China—of trade-in programs added to revive iPhone sales. The company is offering customers with older iPhone models above-average prices for those devices if they exchange them for new iPhones, he said.
Investors have largely shrugged off the iPhone troubles and focused on Apple’s potential to generate billions of dollars in revenue by selling subscriptions across the more than 900 million iPhones world-wide. They also were encouraged that the company struck a multiyear agreement in April with Qualcomm Inc. for smartphone modem chips that should allow Apple to deliver an iPhone in 2020 with speedier, 5G wireless technology.
“They have reset expectations,” said Mike Bailey, research director at FBB Capital Partners LLC, which has $1.1 billion under management and counts Apple among its top-10 holdings. “The next catalyst Apple needs to get sales growing are features like 5G. That factor went from negative to positive in the quarter because of the resolution with Qualcomm.”
Apple’s share-repurchase plan is down slightly from last year’s $100 billion commitment, which was the largest ever announced by a U.S. company, according to data from research firm Birinyi Associates. Apple has bought back $71.6 billion since announcing that prior commitment, bringing total repurchases since 2012 to nearly $275 billion. Apple didn’t give a timetable for when it will fulfill the new commitment.
The company’s board also approved a 5% increase in its quarterly dividend to 77 cents a share, building on last year’s 16% increase.
Apple continues to struggle with broader economic challenges in China, where slower growth has hurt companies including 3M Co. and Intel Corp. The iPhone maker’s sales from Greater China, which includes Hong Kong and Taiwan, fell 22% in the just-ended fiscal second quarter, an improvement from the prior quarter.
Apple recently reduced iPhone prices in China to be more competitive with lower-price handsets from rivals like Huawei Technologies Co. and Xiaomi Corp. That bolstered sales in China during the quarter, analysts said, but iPhone shipments still fell 30% to an estimated 6.5 million units, according to Canalys, a market research firm. Booming Economy? US Treasury Can’t
Mr. Cook said Apple has been helped by the Chinese government’s move to stimulate the economy by reducing value-added taxes, and by a boost to consumer confidence from signs of progress in U.S.-China trade talks.
Apple also delivered 30% sales growth from its wearables division that includes its smartwatch, AirPods wireless headphones and HomePod smart speaker. Analysts project that will be a $21.76 billion business this fiscal year.
The combination of wearables and services accounted for 29% of total revenue in the fiscal second quarter, while the iPhone fell to 54% of sales from its typical level of two-thirds.
“Thank goodness for the services side of the business because if they didn’t have that Apple would be a super-cyclical hardware-only company,” said David Rolfe, chief investment officer of Wedgwood Partners Inc., a St. Louis-based firm with $3.1 billion that counts Apple as its third largest holding. “It’s grown its ecosystem and given people more reasons to stick around.”
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