Working for the Man

Working for the Man

Julia Coronado - Market Economics
US Daily Spotlight | 10 Jan 2013 00:15 |

The corporate earnings season got off to a positive start on Wednesday, with Alcoa beating market expectations in Q4 and raising its 2013 outlook. The company cited an improving Chinese economy and its own cost-cutting measures and productivity gains. A number of equity analysts are fairly bullish on the prospects for US corporations, although this is an outlook increasingly tied to the global outlook, with sometimes minimal positive spillovers to, or dependency on, the US economy.

Despite volatile swings, the US corporate sector has generated impressive gains in profits per domestic resident over the past 20 years. Much of this reflects how well US companies have shifted their focus to and taken advantage of stronger growth prospects abroad. International operations generated less than 5% of profits in 1950, but now account for more than 20%. While growth in international revenues slowed last year with the global economy, Alcoa’s results suggest the outlook for 2013 is a little brighter. Since much of the expansion in capital investment and hiring is occurring abroad, however, the implications for the US economy are more muted.

Today, we expect President Obama to officially nominate Jack Lew as Treasury Secretary to replace Timothy Geithner, who has insisted on stepping down at or before the end of the month, despite the crucial, upcoming debate on the debt ceiling. Mr. Lew’s nomination has been rumoured for months, but he will now need to be quickly confirmed in order to be up and running in time for negotiations over the debt ceiling, sequestration spending cuts and the end of the government’s spending authority on 27 March.

Mr. Lew is currently the White House Chief of Staff and has held this post since 2009. Before that, he briefly served as the Director of the Office of Management and Budget. During the Bush Administration, Mr. Lew spent time in positions at New YorkUniversity and Citigroup. At Citigroup, he headed an alternatives investment unit. During the Clinton Administration, Jack Lew served in various positions at the Office of Management and Budget, culminating in being named Director in 1998. Mr. Lew described himself in an interview with Politico.com as a translator between number crunchers and politicians.

Mr. Lew is not someone with a significant external reputation or influential view of the world, the US economy or economic policy. His experience in the private sector and financial markets is minimal. Rather, he is a true company man for Democratic administrations. We interpret his nomination in the context of the recent harder line from President Obama and his intention to lead from the top and be a tougher negotiator with Republicans. Since he has been confirmed to political positions on numerous occasions, Mr. Lew’s nomination is unlikely to be deeply controversial, and we expect him to win confirmation. However, it highlights that the upcoming fiscal negotiations will be a dogfight that goes down to the wire. This was highlighted in the president’s press conference yesterday, in which he restated that he refuses to negotiate on the debt ceiling since it is the responsibility of Congress to pay its bills.

We will also hear from two Fed speakers today. Kansas City Fed President George and St. Louis Fed President Bullard. These two are the most hawkish voters on the FOMC in 2013, and both are delivering remarks on the economic outlook. Within the context of the minutes from the December FOMC meeting, we expect to hear where these two key players are with respect to their support for QE. We view President George as the most likely potential dissenter.