Policy: Economy

The week ahead in economics: Fiscal showdown prep, the Fed pick, and inflation

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Fiscal Policy,PennAve,Joseph Lawler,Economy,Federal Reserve,Budgets and Deficits,Janet Yellen,Larry Summers

With President Obama vacationing on Martha’s Vineyard and Congress in its second week of August recess, the biggest action in economics policy is once again happening off stage.

While immigration is the hottest topic in town halls across the country, both Republicans and Democrats are keenly aware that a budget showdown is waiting just a few weeks after the House of Representatives returns to Washington in September, with a shutdown looming on Oct. 1 if the two sides can’t reach a compromise on spending.

And once the government funding issue is resolved, the debt ceiling will become the big issue. The limit, which the Treasury Department is already up against, is supposed to become binding in mid-October to mid-November. Both President Obama and Senate Majority Leader Harry Reid have vowed not to negotiate over giving the Treasury the ability to issue debt to pay the government’s bills. House Speaker John Boehner, however, has indicated that Republicans will again seek spending cuts equivalent to the size of the requested debt limit increase.

A government shutdown or any drama over a government default is the biggest foreseeable threat to the slow and weak U.S. economic recovery. Officials’ behind-the-scenes planning to avoid such a scenario is the story of the week.

One other issue likely on the top of Obama’s economic team’s agenda is the decision regarding the Federal Reserve chairman. Obama has said he will choose a replacement for Ben Bernanke in the fall. Whoever his pick is will immediately be deeply involved in the most-anticipated maneuver in the Fed’s history, namely the tapering of its stimulus bond-buying program.

Current Fed Vice Chair Janet Yellen and Harvard professor Larry Summers are the top two candidates in what has become a surprisingly hotly debated selection process. Summers, if nominated, could spark a civil war among congressional Democrats during the nomination process. Many Democrats have objected to Summers on the grounds that he’s too cozy with Wall Street banks and too reluctant to regulate them to the extent necessary.

Obama explained why Summers remains on top of his list on Friday before leaving for vacation. He said his consideration of Summers was a response to criticisms of his former adviser, saying that “when somebody’s worked hard for me and worked hard on behalf of the American people and I know the quality of those people and I see them getting slapped around in the press for no reason before they’ve even been nominated for anything, then I want to make sure that somebody’s standing up for them.”

Obama’s timeline is suspect, given that the attacks on Summers were provoked by insider reports that he was a top candidate for the Fed job. Nevertheless, whatever his logic, Obama’s deliberations about who should run the central bank in the weeks ahead will be hugely consequential for the U.S. economy.

Meanwhile, a number of economic reports that will move markets and indicate the strength of the economy are due out this week.

On Monday, the Treasury Department will announce receipts and outlays for July; a deficit of around $90 billion is expected.

Later in the week, two gauges of inflation are due. Analysts expect readings for July of moderate inflation after a slight uptick in June. The Producer Price Index is out Wednesday, and the Consumer Price Index — the most commonly used statistic for inflation — will be published Thursday.

On Friday, the Census Bureau and Department of Housing and Urban Development will give the latest peek at the state of the housing market with a report on new construction. Economists predict a slight improvement on June’s numbers.

Also on Friday, the University of Michigan’s measure of consumer sentiment is due. Analysts expect that the index will show that Americans are continuing to be increasingly willing to spend money.

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