Reversal of U.S. fiscal drag

The Week-end News: Featuring talking points on the most recent financial news – February 13, 2015

Since the financial crisis of 2008-2009, the U.S. economy has been battling headwinds caused by “fiscal drag”. In an attempt to lower the budget deficit, the government implemented austerity measures to cut spending and increase taxes (which essentially cut consumer spending). Decreased spending by both consumers and the government creates a “drag” on the economy. However, there have been positive developments in the fiscal policy – the government’s ‘playbook’ for spending levels and tax revenues. The chart illustrates the change in government austerity over the past several years and estimations for 2014 and 2015. Of note is austerity’s impact in 2013 when large tax hikes and the “sequester” – a series of budget cuts – came into play. As a result, these measures made it harder to stimulate consumer spending, create jobs, and fund vital investment projects. Going forward, the good news is that the fiscal drag continues its reversal, in large part as a result of higher tax revenues thanks to the gradually improving U.S. economy. Bottom line? This progress means that government austerity will pose less of a fiscal drag on economic growth and could serve as a tailwind for the U.S. recovery in 2015 and beyond.

Amex and Costco split up

January’s Wall Street losses are now a distant memory as stocks reached their highest levels of 2015 this past week, which included a record high for the S&P 500. American Express and Costco announced that they are ending a 16-year partnership in which AmEx was the only credit card accepted by the big warehouse retailer. Apparently people love Candy Crush, but not Farmville. King Digital, the company behind Candy Crush, beat estimates, but Zynga, which produces Farmville and Words with Friends, fell short. Two online travel giants are merging: Expedia agreed to buy Orbitz for $12 per share, which follows Expedia’s recent purchase of Travelocity. If you use dating apps on your smartphone, watch out. IBM found that 26 of 41 dating sites it examined had medium to high severity hacking vulnerability. However, IAC, the company behind match.com, OKCupid, and Tinder was quick to point out that its offerings were not among those at high risk.

Buy Buffet’s Cadillac

Sources: www.stats.oecd.org: OECD Economic Outlook No. 96, November 2014 – OECD Annual Projections, Reuters, USA Today, PC Magazine, Bloomberg, Barron’s, CNN, Wall Street Journal.

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