Experts Talk Health Care, Home Sales, China-U.S. Currency

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 23.

Alec Phillips, Goldman Sachs

The health-reform bill that will become law [on Mar. 23] could provide a slight boost to small business hiring in the near term, due mainly to the tax credits that it will provide small businesses that provide insurance, with no penalty for those that do not. The result should be a net reduction of around 4% in the incremental cost of labor among the smallest firms.

The bill's main provisions, which take effect in 2014, provide more mixed incentives. The smallest firms will see even more generous tax benefits, but slightly larger firms (those with 50 or more employees) will face penalties if they do not provide coverage. Moreover, the bill will establish employer-size thresholds that firms may not want to cross, marginally reducing the incentive to hire.

The biggest unknown is whether employers will attempt to shift costs to federally subsidized health plans once they are up and running. CBO estimates imply that this is not a major risk, and indeed the bill includes tougher penalties on firms whose employees take federal premium subsidies. Nevertheless, the incentive for firms to shift costs is clear, so this will be an area to watch.

David Resler, Nomura Securities

Nearing the stroke of midnight, the U.S. House of Representatives enacted two separate bills needed to complete the reform of the US health-care system. The President is expected to sign the first (and perhaps the second) into law on [Mar. 23]…[altering] the business landscape of fully one-sixth of the U.S. economy.

Most of those effects will be felt later, when the bills' provisions are fully implemented, but the sweep of this reform is likely to have some impact on economic activity almost immediately. The Congressional Budget Office estimates that the various provisions of the reform measures will reduce the on-budget deficit by about $48 billion over the next 10 years but will increase the deficits by about $10.4 billion over the current and subsequent two fiscal years.

For the short run, it seems likely that the new uncertainties—in the form of a new and uncertain structuring of health-care costs to employers—will act as a modest deterrent to hiring. Meanwhile, some of the costs of compliance will begin almost immediately as some of the taxes imposed, especially on the wealthy, will take effect sooner than the rest of the reform measures.

David Onyett-Jeffries, RBC Capital Markets

Existing home sales in the United States declined 0.6% in February to 5.02 million annualized units, from the previous month's unrevised 5.05 million. Home prices also fell, dropping 1.8%, relative to February 2009. The decline in price is a deterioration from the 0.1% increase in January, although it compares favorably with an average 2009 decline of 12.4%. The U.S. housing market continued to show signs that it is struggling to catch on to the general strengthening trend as seen across the economy, with existing home sales falling for the third-consecutive month. The pace of decline, however, eased because the weakness in single family homes (-1.4%) was partially offset by modest improvements in condo and co-op sales (+4.8%). Soft sales in the South (-1.1%) and West (-4.7%) regions were offset by gains in the Northeast (+2.4%) and Midwest (+2.8%).

The annual change in median prices of existing homes fell in February by 1.8% because distressed housing sales (which made up 35% of total sales) weighed down prices. In terms of inventories of unsold homes, as measured by months' supply of unsold homes on the market, February's figure rose to 8.6, from January's 7.8. The absolute number of unsold homes for sale rose 9.5% to 3.59 million.

The report suggests that housing market activity in the U.S. continues to be disappointingly weak and it is likely to remain soft until sustained growth is seen in employment.

Ethan Harris, Bank of America Merrill Lynch

The recent ratcheting up of rhetoric between China and the U.S. is a reminder of the fragile nature of the global economic recovery. The U.S. Treasury is scheduled to release its biannual report on currency manipulation on Apr. 15. This is stoking the biannual calls for not just designating China a manipulator, but also putting tariffs on Chinese products. With U.S. unemployment near 10% and a very contentious election looming in November, the rhetoric could get quite hot this year and some additional small protectionist measures are likely, in our view.

Not to be outdone, Chinese Premier Wen Jaibao has countered that the U.S. is the real source of the problem. In a number of venues he has argued that the yuan is not overvalued and that the US is trying to enlarge its exports by weakening the dollar: "I understand that some countries want to increase their exports, but I don't understand the practice of depreciating their currency and forcing others to appreciate theirs in order to accomplish this," Wen argues. He also urges the U.S. to "take concrete steps" to protect Chinese investments in the U.S. Treasury market. We assume this means tightening monetary and fiscal policy.

Two (or three) wrongs don't make a right. We believe the best policy path going forward—for the global economy, the U.S., and China—is for China to start revaluing the yuan, for the U.S. to stay the course with super-easy monetary and fiscal policy, and for the U.S. to forgo protectionism.

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