Economy Watch: Fed Pulls in Tidy Sum, Hands it to U.S. Government

By Dees Stribling, Contributing Editor

The Federal Reserve reported on Tuesday that it gave the U.S. Treasury $76.9 billion in profits in 2011, not quite as much as in 2010, but still a very high total by historical standards. During the five years before the recession, the Fed’s contribution to federal government coffers averaged only about $23 billion. Since 2007, that annual average has been $54 billion.

The law requires the Fed to dispose of its profits in that way, though since much of the central bank’s income comes from holding $2.5 trillion in Treasury Securities, it’s partly a roundabout circulation of money. Still, as Ben Bernanke points out, at least the interest on those Treasuries isn’t going to investors who aren’t obliged to pay their profits to the government, or even much like the United States. “It’s interest that the Treasury didn’t have to pay to the Chinese,” the chairman told Congress last year.

By contrast, the European Central Bank hasn’t been (well, can’t be) so aggressive in vacuuming up sovereign debt, leaving euro-zone nations to find ordinary, returns-expecting investors to buy their debt—if possible. In the euro zone, Spain, Italy and Germany will all try to auction debt this week for the first time in 2012. Germany might not have any problem in unloading 4 billion euros worth of five-year notes. All bets are off for Italy and Spain, however.

Small businesses feel a little better

Despite the ongoing woes in Europe, small businesses in the United States, like investors and consumers, seem to be less grumpy these days, according to the National Federation of Independent Business. That organization’s Optimism Index rose 1.8 points, for a December reading of 93.8. This represents the fourth monthly uptick since September, suggesting that the rising trend might stick—unless it doesn’t, which is what happened in early 2011.

In fact, the total reading is still in recession territory, says the NFIB. The index is six points below the pre-recession average and more than 10 points below the same point in the recovery from the 2001 recession (though admittedly, the 2001 recession was small beer compared with 2008). Still, the gains in the NFIB index intimates that economic growth will pick up in 2012, but nothing dramatic.

“Much of December’s gain resulted from the fact that concerns about business conditions over the next six months have subsided and because many small-business owners have improved their expectations for real sales gains in the coming months,” said NFIB chief economist Bill Dunkelberg in a statement. “But … similar gains in the early part of 2011 quickly faded, and the index is still well below where it should be at this point in the recovery.”

Italy the problem, says Fitch

The major ratings agencies were busy on Tuesday offering opinions (and some data) about various aspects of the international economy. Fitch, for one, said that the real risk these days in the euro zone isn’t Greece, but Italy. At the moment, Italy holds an A+ rating from Fitch, but with a negative outlook, and the ratings agency warned of a downgrade for Italy, as it  recently warned Belgium, Cyprus, Ireland, Slovenia and Spain. France, on the hand, is likely to keep its AAA for the rest of 2012 at least.

Moody’s Investors Service reported that the 12-month trailing default rate for speculative-grade corporate debt (junk, that is) stood at 1.7 percent at the end of 2011, down from 1.8 percent during the fourth quarter, and 3.2 percent from a year earlier. That doesn’t seem like much of a change quarter-over-quarter, but it does mask a difference between Europe and the United States in this particular metric. A year ago, the default rate in the U.S. was at 3.4 percent; now it’s 1.8 percent. In Europe, the default rate was 2.3 percent a year ago; now it’s 2.7 percent.

Wall Street, buoyed by the prospect of decent quarterly returns from some of the larger corporations, led by Alcoa, was up again on Tuesday. The Dow Jones Industrial Average gained 69.78 points, or 0.56 percent, while the S&P 500 advanced 0.89 percent and the Nasdaq was up 0.97 percent.