Immigrant small business owners: bringing big bucks to Main Street
What would Main Street America look like without immigrants?
Picture vastly fewer restaurants (37% of the industry’s ownership is foreign-born), hotels and accommodation (43% foreign-born ownership), dry cleaning and laundry facilities (54% foreign-born), and nail salons (37%). It would be that much harder to go out for a treat (bakeries, 32% immigrant-owned), fill up the tank (gas stations, 53%), or grab a bottle of wine on the way to a dinner party (beer, wine and liquor stores, 42%).
As President Barack Obama announces a big shift in immigration policy that will offer greater leniency to individuals under 30 who came into the United States as undocumented children, a new report from the New York-based Fiscal Policy Institute highlights just how broad a role immigrants play in the world’s largest economy.
In his speech this week, President Barack Obama hinted at the new policy:
If we truly want to make this country a destination for talent and ingenuity from all over the world, we won’t deport hardworking, responsible young immigrants who have grown up here or received advanced degrees here. We’ll let them earn the chance to become American citizens so they can grow our economy and start new businesses right here instead of someplace else.
Most people have a notion of how immigrants contribute to their community’s economy. Take an inventory of any main street or downtown area, and you’re likely to find more than a few small businesses – doctors’ offices, nail salons, grocery stores – whose owners hail from overseas. The Fiscal Policy Institute report is the first survey to take a macro look at the state of small business ownership among immigrants across the country. It found that immigrants are not just employees, but increasingly, employers.
The immigrant share of small business owners, at 18 percent, is higher than the immigrant share of the overall population (13 percent) and the immigrant share of the labor force (16 percent).
More than half – 57 percent – of these small businesses have at least one paid employee in addition to the owner, the same share for both U.S.- and foreign-born business owners. And, of those with employees, the average number of employees is 13.6 (11.0 for immigrants, 13.9 for U.S.-born).
Battening down the hatches
There’s a high degree of battening down the hatches going on before the Greek election by policymakers and market in case a hurricane results.
G20 sources told us last night that the major central banks would be prepared to take coordinated action to stabilize markets if necessary –- which I guess is always the case – the Bank of England said it would flood Britain’s banks with more than 100 billion pounds to try and get them to lend into the real economy and we broke news that the euro zone finance ministers will hold a conference call on Sunday evening to discuss the election results – all this as the world’s leaders gather in Mexico for a G20 summit starting on Monday. Bank of England Governor Mervyn King said the euro zone malaise was creating a broader crisis of confidence.
The central banks acted in concert after the collapse of Lehmans in 2008, pumping vast amounts of liquidity into the world economy and slashing interest rates. There is much less scope on the latter now. The biggest onus may fall on the European Central Bank which may have to act to prop up Greek banks and maybe banks in other “periphery” countries too although the structures to do so through the Greek central bank are in place and functioning daily. In extremis, we can expect Japan and Switzerland to act to keep a cap on their currencies too. As a euro zone official said last night, a bank run might not even be that visible and start on Sunday night over the internet rather than with queues of people outside their local bank on Monday morning.
But there’s probably a greater likelihood that markets won’t melt down on Monday. A startlingly strong victory for the anti-bailout SYRIZA would cause serious tremors but far more likely is an inconclusive result which leads to days of horse-trading over the formation of a government. And there’s also a strong chance that pro-bailout New Democracy comes first and claims the 50-parliamentary-seat bonus. That would put it in pole position to form the next government, an outcome that could see markets rally strongly and take pressure off Italian and Spanish borrowing costs. Whatever the result, it’s hard to see a durable, stable government being formed so if there is any relief, it could prove to be short-lived.
The odds of dramatic coordinated global action on Monday are probably fairly long and will clearly be dictated by events. However, it is also clear that the prospect of more measured action – as from the Bank of England – is increasingly likely. A Federal Reserve policy meeting next week will have markets travelling in hope though they may arrive with disappointment.
Today, we have ECB chief Mario Draghi and others speaking at a Frankfurt conference with Germany’s Merkel and Schaeuble also in public. His colleague, Bundesbank head Jens Weidmann, is already out saying the euro zone can’t allow any country to blackmail it with the threat of contagion.
Euro zone survival is in the eye of the beholder
Despite all their years of experience and complex mathematical models, for economists the question of the euro zone’s survival really has them at the mercy of national bias… at least in terms of where their employer is based.
One of the key points from the latest Reuters poll was that a majority of economists from banks and research houses around the world – 37 out of 59 – expect the euro zone to survive in its current form for the next 12 months.
But behind that headline figure, the answers were skewed heavily by region.
Only 5 out of 24 economists from organisations based inside the euro zone thought it would fail to survive in its present 17-nation form over the next 12 months.
But nearly half (17 out of 35) of those employed by institutions based outside the euro zone – British, North American, Scandinavian or Swiss – expected to see at least one country leave the currency union over the next year.
“Will the euro zone survive in its current form for the next 12 months?” sounds like a scientific question. But clearly the answer depends at least partly on the locale of an economist’s employer, rather than economics.
In the shadow of Greek elections
Italy, rapidly moving centre stage after the euro zone’s failure to assuage markets with a 100 billion euros Spanish bank bailout, faces a crunch bond auction. Having paid four percent to borrow for a year yesterday, it is likely to fork out over five percent for three-year paper although the smaller than usual target of up to 4.5 billion euros means the sale should get away. It will also issue a smattering of 2019 and 202 bonds.
Technocrat prime minister Mario Monti’s honeymoon period is over with even some he would have considered allies decrying the slow pace of his reform programme. Already this week he has appealed to Italy’s fractious political parties for support in keeping the austerity show on the road. Today, Monti hosts France’s Francois Hollande. They agree on a lot – the need for a stronger growth strategy, a banking union established sooner rather than later and a longer-term goal of euro zone bonds. Berlin, with the possible exception of the first goal, definitely does not.
Moody’s slashed Spain’s rating to just one notch above junk last night. The power of the ratings agencies to shock is significantly diminished but if Spain’s sovereign rating drops further, more of whatever non-Spanish bank private investors are left will be forced to head for the exits. Moody’s noted that the bank bailout will increase Spain’s debt burden and the dangerous of loop of damaged banks being the main buyers of Spanish government debt which is falling in value. It repeated its warning that euro zone ratings could be cut further if Sunday’s Greek election were to increase the chances of that country leaving the euro.
We interviewed EU competition chief Almunia late yesterday who said Spain may need to wind down one of its bailed-out savings banks and later we get data on how much Spain’s banks borrowed from the ECB last month.
On Greece, plans must be afoot for the aftermath of the election. It looks likely that the bloc will give Athens an extra year to make the spending cuts demanded of it if there is any sort of government which will continue with the bailout. Spain has just been granted the same with Germany’s blessing. PASOK leader Venizelos asked for precisely that while New Democracy chief Samaras wants two years more. Most sane judges think a third bailout and a fundamental reappraisal of the austerity programme will be needed to stop Greece falling off the rails at some point, but there’s not much prospect of that coming quickly. And what will the ECB do? Presumably it stands ready to prime Greek banks with even more liquidity.
There are many good reasons to keep Greece in the euro zone even if it did default – not least the chaos that would ensue, resulting in an essentially failed state that would have to be flooded with aid. Cyprus added to the list yesterday, saying it may look to Russia and China rather than Europe for money to prop up its banks which have been holed below the water line by their exposure to Greece. That would be a move of huge geopolitical implications. If Greece contemplated the same it would be even more so.
Interestingly, Washington in the guise of Treasury Secretary Geithner is urging the rest of the euro zone to get behind Germany’s push for fiscal union, calling for a maximum of clarity on the plans as early as possible. In a distinct change of tone, he said it was unfair to look at Germany as the sole source of the problem. Expect much more on this at next week’s G20 though doubtless Merkel will come under serious pressure as well.
Is Germany the next domino?
Throughout Europe’s financial crisis, German government bonds have been seen as a safe-haven for those seeking protection against the troubles of southern Europe. However, the confidence of financial markets in Germany’s finances may finally be starting to falter as the cost of a festering financial crisis rises – and the country is seen as ultimately holding the bag.
Demand at the latest government bond auction remained solid. However, the slide in German bunds continued into a second day and, worryingly, it was driven in part by worries about contagion after Spain’s poorly-received 100 billion euro bank bailout.
According to Capital Economics:
The last few days have brought clear signs that bunds are finally losing their safe-haven status.
The markets are starting to see bad news for the periphery as bad news for Germany too. If so, there would appear to be scope for this process to continue as the crisis deepens and the fork in the road to either fiscal union or break-up gets nearer.
Central bankers vs. politicians: High-stakes chicken?
Are politicians playing chicken with central bankers? More to the point, if the U.S. Federal Reserve or the European Central Bank step up, yet again, to protect their economies from the global slowdown, will it take U.S., German, Spanish, Italian, Greek and other governments off the hook?
Such questions are swirling as Europe’s financial crisis boils and starts to bubble over into Asia and the Americas. Expectations are growing that the Fed will take more monetary policy action when it meets June 19-20. The messy possibility that Greece could exit the euro zone was not enough to prompt the ECB to cut interest rates last week – and that was before a deal over the weekend to bail out Spanish banks was dismissed by markets as just another kick of the can. Underlining the standoff between monetary and fiscal policymakers, ECB President Mario Draghi told European Parliament this on May 31:
Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no.
European central bankers “feel in some ways that the more they do, the more it takes pressure off the fiscal authorities,” said Lewis Alexander, U.S. chief economist at Nomura Securities. “So they’ve been reluctant to be more aggressive.”
The Fed, for its part, has one worried eye on the European crisis and the other on the U.S. “fiscal cliff” of big tax rises and spending cuts scheduled to kick in at the end of this year. Policymakers at the U.S. central bank rarely pass up a chance to publicly chastise Congress for putting off action on the cliff, which could slash U.S. GDP growth by an estimated 3 percentage points if left unaddressed. Meaning, of course, the United States would join much of Europe in another recession.
Chairman Ben Bernanke has said the Fed stands ready to protect the fragile U.S. recovery, but gave few clues that was imminent at a Congressional hearing in Washington last week.
I do want to say, and I’ve said this before, that monetary policy is not a panacea. It would be much better to have a broad-based policy addressing a whole variety of issues… I’d be much more comfortable in fact if Congress would take some of this burden from us and address those issues.
Law of diminishing returns
The law of diminishing returns? The first euro zone bailout, of Greece, bought a few months of respite, the next ones bought weeks, latterly it was days. Now … hours. Spanish bond yields ended higher on the day and, more worryingly, Italy’s 10-year broke above six percent. It was always unlikely the deal to revive Spanish banks was going to lead to a durable market rally with make-or-break Greek elections looming on Sunday but there were other things at play.
Top of the list is that the bailout will inflate Spain’s public debt and the dangerous loop of damaged banks buying Spanish government bonds that are falling in value. There’s also the fact that Germany and others are keen to use the new ESM rescue fund to funnel money to Spain because of the greater flexibility it offers. That will make private investors subordinate to the ESM which could prompt another rush for the exits which Madrid can ill afford since this is the first euro zone bailout which keeps the recipient active in the bond market. It’s for the same reason that a revival of the ECB’s bond-buying programme, which it still doesn’t fancy, could prove counter-productive.
Officials are already pondering that conundrum, suggesting that the loan to Spain could initially be made under the existing EFSF bailout fund then taken over by the ESM, though that sounds like the sort of creative thinking in Brussels that generally fails to convince investors. Another cracking Retuers exclusive following our breaking of the Spanish bailout on Friday, showing European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro, is unlikely to have settle market nerves.
Today, the ECB releases its bi-annual report on risks facing the financial system. I’d imagine it will have a fair amount to say. For now, it seems content to let governments take all the strain of crisis management. Plenty of policymakers, Hollande, Merkel, Monti and Van Rompuy included, are speaking today but having done their bit for Spain over the weekend it’s really eyes down for the Greek election now, swiftly followed by a G20 summit and a key gathering of EU leaders at the end of the month. There, some light will be shed on longer-term plans to make the euro zone a more durable economic union, although this is going to be a long haul – too late to address the current crisis. We’re expecting French and German briefings today, the latter on the Los Cabos G20.
There’s also a groundswell behind setting up a banking union, including a deposit guarantee fund, quickly. European Commission chief Jose Manuel Barroso, ECB policymaker Christian Noyer and French Finance Minister Pierre Moscovici are all espousing it today. Germany, where the bill will fall, is much more reticent and wants to see the drive to fiscal union, which will take many months even years of negotiation, treaty change and parliamentary ratifications, completed first.
Spanish bailout blues
100 billion used to be a big number. These days, it barely buys you a little time.
Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its ailing banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
A bailout for Spain’s banks, struggling with bad debts since a property bubble burst, would make it the fourth country to seek assistance since the region’s debt crisis began, after Greece, Ireland and Portugal.
According to Nicholas Spiro at Spiro Sovereign Strategy:
(The) decision by the Spanish government to announce its intention to formally request external financial assistance is the most significant and alarming development in the two-year-old euro zone crisis.
One of the two southern European economies that matter most to the future of the euro zone, and the bloc’s fourth-largest, is no longer capable of managing its own financial affairs.
Market reaction is unlikely to be favourable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries (in particular Ireland) are likely to object to and risks putting pressure on Italy.
Speculation that a European policy response for Spain’s banking problems would soon come and hopes for more central bank stimulus eased pressure on Spanish yields this week, after they rose near 7 percent danger levels the week prior.
Any market reaction could be complicated by concerns about Italy, the euro zone´s third largest economy. Will a rescue for Spanish banks be enough to contain market pressure on riskier debt or will it fuel this by depleting the funds available to deal with Italy should contagion spread?
As financial conditions tighten, Fed may have to run to stay in place
Seemingly lost in the talk about whether or not the Federal Reserve should ease again is the idea that financial conditions have tightened and the U.S. central bank may have to offer additional stimulus if only to offset that tightening. Writes Goldman Sachs economist Jan Hatzius:
Alongside the slowdown in the real economy, financial conditions have tightened. Our revamped GS Financial Conditions Index has climbed by nearly 50 basis points since March, as credit spreads have widened, equity prices have fallen, and the U.S. dollar has appreciated.
Goldman’s new GS Financial Conditions Index is based on the firm’s simulations with a modified version of the Fed’s FRB/US Model. It includes credit spreads and housing prices and has a closer relationship with subsequent GDP growth than the previous version of the index, the firm says. A 100-basis-point shock to the GSFCI shaves 1-1/5 percent from real GDP growth over the following year. Still, it’s not quite as bad as it sounds:
Some of this tightening is clearly a reflection of the weaker U.S. economic numbers, so we should not ‘double-count’ it as a negative impulse to growth. And some of it has been offset by the fall in oil prices, which has kept the ‘oil-adjusted’ GSFCI from tightening nearly as much.
The intensification of the European crisis as concern about the Greek election and Spanish banking system mounts accounts for up to half of the tighening in the GSFCI since April, Hatzius said. “We estimate this could shave 0.2 to 0.4 percentage points from U.S. GDP growth over the next year.”
Goldman Sachs expects U.S. growth to average slightly less than 2 percent over the next year, with Q1 2013 the weakest quarter at just 1.5 percent “due to the likely fiscal tightening” then.
Talk of a possible rescue of Spain’s banks wafted through global financial markets before the weekend. The “hit” from Europe to U.S. growth could increase or decline, but the risks are “skewed to a worse outcome than our current baseline,” Hatzius said.
Modest U.S. growth prospects riddled with risks: bank economists
Despite all the flashing yellow signs in the global economy, banking sector forecasters are sticking – if a bit uneasily – to their modestly optimistic outlook. Still, a group of economists from the American Bankers Association, a banking lobby that presented its latest economic projections to Federal Reserve officials this week, highlighted plenty of risks. Chief among them were financial contagion from Europe and sharp fiscal adjustments in the United States.
They see U.S. gross domestic product expanding at a pretty subdued 2.2 percent this year, and then slowing to 2 percent in 2013. The forecast assumes that Europe will come to some sort of resolution that puts a floor under its troubled debt markets. Even so, the ABA committee saw a 55 percent chance that one or more countries would exit the euro, with Greece topping the list.
At a press conference on Friday presenting the group ‘s findings, George Mokrzan, chair of the committee and economist at Huntington Bancorporation in Columbus, Ohio, said one worrisome factor for the U.S. economy was the lack of income growth for most American workers. He said this could crimp consumer spending, which accounts for the vast bulk of U.S. economic activity.
“That could become an issue if there are other shocks to the economy,” he said.
Even if growth does muddle along, it will not be fast enough to substantially bring down unemployment, currently at 8.2 percent.
Although economic growth will pick up, downside risks have become more pronounced. Our consensus forecast is that the economy isn’t growing rapidly enough to push the unemployment rate below 8 percent before year end.
The ABA economists, most of whom work at some of the nation’s largest banks, do not expect the Federal Reserve to embark on a new program of bond buying despite recent signs of weakness in the U.S. labor market. But they did argue that the Fed’s policy of ultra low rates has provided crucial support to consumers’ personal finances. Said Mokrzan: “Low rates are helping consumers make progress in improving their balance sheets.”
