Sunday, March 9, 2008

Sales Probably Cooled as Fuel Prices Rose: U.S. Economy Preview

Sales Probably Cooled as Fuel Prices Rose: U.S. Economy Preview

By Bob Willis

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Consumer spending at U.S. retailers slowed in February as increasing fuel costs eroded Americans' buying power, economists said reports this week will show.

Purchases rose 0.2 percent last month after a 0.3 percent gain in January, according to the median estimate in a Bloomberg News survey before a March 13 Commerce Department report. Figures from the Labor Department the following day may show the cost of living increased.

A weakening job market and rising gasoline costs are hurting consumer confidence and spending, increasing the odds the economy is already in a recession. Investors last week raised bets the Federal Reserve will keep cutting the benchmark interest rate, currently at 3 percent, as it focuses on reviving growth over taming inflation.

Sales are ``reflecting the many strains on consumers,'' said Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York. ``We expect the Fed to cut rates to 1.5 percent by early 2009.''

Auto purchases in February were little changed from a three-year low reached in January, according to industry figures last week. Retail sales excluding automobiles also increased 0.2 percent after a 0.3 percent January gain, according to the Bloomberg survey.

Sales at chain stores in February increased more than forecast, as consumers suffering from higher fuel bills and the slump in hiring rushed to discounters such as Wal-Mart Stores Inc., according to figures from the International Council of Shopping Centers issued last week.

Confidence Wanes

``It does seem like this consumer sentiment is continuing to be affected by housing and credit,'' Richard Wagoner, chief executive officer of General Motors Corp., said in a Bloomberg Television interview March 4. ``I honestly can't tell you when and if we're going to see things turn back this year.''

Ethan Harris at Lehman Brothers and Bruce Kasman at JPMorgan Chase & Co. were among economists last week who said the U.S. had already fallen into a recession after the Labor Department reported the economy lost 63,000 jobs in February. They joined colleagues at Merrill Lynch & Co., Goldman Sachs Group Inc. and Morgan Stanley who had previously made a similar call.

The decline in payrolls was the second in a row and the biggest since March 2003.

``It's another nail in the consumer's coffin,'' said Josh Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.

16-Year Low

Weaker job growth, the biggest declines in home prices in at least 20 years and energy costs at record highs have shaken Americans' confidence. Consumer sentiment probably fell this month to the lowest level in 16 years, economists project a preliminary report from Reuters/University of Michigan on March 14 will show.

A Labor Department report on the same day may show prices paid by consumers rose 0.3 percent in February, according to the Bloomberg survey median, after a 0.4 percent gain the prior month. Excluding food and energy, so-called core prices probably increased 0.2 percent after a 0.3 percent gain the prior month.

Even as growth is slowing, inflation remains a concern for Fed policy makers as crude oil prices continue to rise, reaching an intraday record of $106.54 a barrel last week.

Bigger Risk

Still, some Fed policy makers have reiterated in recent weeks that slowing growth is the greater risk to the economy.

The Fed ``will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' Fed Chairman Ben S. Bernanke said in testimony to Congress Feb. 27.

Traders are virtually certain the central bank will lower the benchmark rate by three-quarters of a percentage point at its March 18 meeting, according to futures markets. A month ago, the odds of a cut that large were only about 25 percent.

Also next week, the Commerce Department on March 11 may report the trade deficit in January widened to $59.6 billion, according to a Bloomberg survey, from $58.8 billion in December, as higher oil prices boosted the cost of oil imports.

                           Bloomberg  News

Release Period Prior Median
Indicator Date Value Forecast
Whlsale Inv. MOM% 3/10 Jan. 1.1% 0.5%
Trade Balance $ Blns 3/11 Jan. -58.8 -59.6
Federal Budget $ Blns 3/12 Feb. -120.0 -165.0
Import Prices MOM% 3/13 Feb. 1.7% 0.8%
Import Prices YOY% 3/13 Feb. 13.7% 14.6%
Retail Sales MOM% 3/13 Feb. 0.3% 0.2%
Retail ex-autos MOM% 3/13 Feb. 0.3% 0.2%
Initial Claims ,000's 3/13 9-Mar 351 355
Cont. Claims ,000's 3/13 2-Mar 2831 2835
Business Inv. MOM% 3/13 Jan. 0.6% 0.5%
CPI MOM% 3/14 Feb. 0.4% 0.3%
Core CPI MOM% 3/14 Feb. 0.3% 0.2%
CPI YOY% 3/14 Feb. 4.3% 4.3%
Core CPI YOY% 3/14 Feb. 2.5% 2.4%
U of [bn:PRSN=1] Mich Conf []. Index 3/14 March P 70.8 69.0

U.S. Stocks Decline to Lowest Prices Since 2006

U.S. Stocks Decline to Lowest Prices Since 2006

By Eric Martin and Lynn Thomasson

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U.S. stocks declined for a second week, falling to the lowest prices since 2006, after record home foreclosures and an unexpected drop in payrolls heightened concern that the economy is in a recession.

Washington Mutual Inc. and CIT Group Inc. led financial shares to the steepest slump in the Standard & Poor's 500 Index. Citigroup Inc. and American International Group Inc. helped send the Dow Jones Industrial Average below 12,000 for the first time since January. Nine of 10 S&P 500 industries slipped after more borrowers with adjustable-rate loans walked away from properties, employers eliminated 63,000 jobs in February and Thornburg Mortgage Inc. and a Carlyle Group fund defaulted on loans.

``The problems that we're seeing in the housing market are going to continue,'' Hans Olsen, who helps oversee $120 billion as chief investment officer of JPMorgan Private Client Services, said during an interview with Bloomberg Television in New York. ``It's clear that we're heading into a period of economic slowdown. Credit is the lifeblood of the economy, so when you have problems it's never easily resolved.''

The S&P 500 retreated 2.8 percent this week to 1,293.37, the lowest close since August 2006. The Dow lost 3 percent, the most in a month, to 11,893.69. The Russell 2000 Index, a measure of companies with a median market value 96 percent less than the S&P 500, dropped 3.8 percent to a two-year low of 660.11.

Financials Retreat

An all-time high in U.S. mortgage foreclosures and the biggest drop in jobs in five years added to signs of economic weakness. New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Payrolls fell for a second straight month in February, the Labor Department said.

The S&P 500 Financials Index dropped 6 percent, bringing its year-to-date loss to 17 percent. Banks, mortgage lenders and bond insurers were six of the 10 biggest decliners in the S&P 500.

Financial shares trimmed their weekly loss after the Fed said yesterday that it will add as much as $200 billion to the banking system over the next month to offset the credit crisis.

Washington Mutual slumped for a fifth week, erasing 28 percent to $10.71. Standard & Poor's lowered the largest U.S. savings and loan's credit rating to two steps above junk and said another cut is possible. Merrill Lynch & Co. said Washington Mutual may report $11.2 billion in losses through next year as more borrowers default on home loans. The stock is down 73 percent in the past 12 months.

`In a Recession'

CIT had the steepest weekly loss since its 2002 initial public offering, tumbling 24 percent to $16.92. KBW Inc. analystSameer Gokhale slashed his first-quarter earnings estimate by 89 percent on expectations the largest U.S. independent commercial finance company will write down the value of its student loan holdings.

``We've been in a recession for a while,'' David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion, said during an interview with Bloomberg Radio. ``We're going to see likely earnings estimates being lowered going into the summer.''

Thornburg plunged 80 percent to $1.79, the lowest price since its 1993 IPO. The home lender may go out of business because it can't meet $610 million of margin calls. Falling prices for mortgage assets and the company's shrinking liquidity ``have raised substantial doubt'' about Thornburg's ability to keep operating, according to a company statement.

Treasury Yields

Carlyle Capital Corp., the publicly traded mortgage bond fund owned by the world's second-biggest private-equity firm, said it missed four of seven margin calls yesterday totaling more than $37 million. Carlyle Group's fund tumbled 58 percent to $5 in Amsterdam trading on March 6.

The yield on two-year U.S. Treasury notes declined to 1.52 percent, the lowest since March 2004. Ten-year notes rose to 3.53 percent. Traders give 92 percent odds that the Federal Reserve will cut its benchmark interest rate to 2.25 percent this month to prop up economic growth. At least $188 billion in bank losses from the collapse of the subprime-mortgage market have pushed the economy to the brink of recession.

Consumers spent less at U.S. retailers in February as increasing fuel costs eroded Americans' buying power, economists said reports next week will show. Purchases rose 0.2 percent after a 0.3 percent gain in January, according to the median estimate in a Bloomberg News survey. A report from the Labor Department may show the cost of living increased.

Three members of the S&P 500 are scheduled to report quarterly results next week: Kroger Co., the largest U.S. grocery chain; Dillard's Inc., the department-store chain; and Liz Claiborne Inc., the maker of Kate Spade handbags and Juicy Couture clothing.

GM Loses Almost a Third of Daily Output as Plant Closings Widen

GM Loses Almost a Third of Daily Output as Plant Closings Widen

By Greg Bensinger

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General Motors Corp. is losing almost a third of its daily U.S. and Canadian vehicle production as parts shortages caused by an 11-day supplier strike shut down more of the automaker's manufacturing network.

GM is building about 5,000 fewer vehicles each day than its 2007 average of 16,000, according to a Bloomberg estimate. The world's largest automaker has closed seven truck factories so far and plans to trim output at another next week.

The closures, sparked by a strike at former subsidiary American Axle & Manufacturing Holdings Inc., will help reduce a stockpile of GM trucks that on Feb. 1 was 24 days higher than the industry average.

``GM's truck supply can actually benefit by not producing as many,'' said Efraim Levy, a Standard & Poor's equity analyst in New York. ``Anything less than a month is a good thing, then it starts to get difficult.'' He rates GM as a ``sell.''

The automaker yesterday announced nine additional engine, transmission and metal-stamping factories would be closed starting March 10 in Michigan, Indiana, Ohio and New York state. That will bring the number of affected parts and auto-assembly factories at Detroit-based GM to 29.

The Bloomberg estimate is an average based on the number of production days in 2007. It doesn't include three plants for which GM won't disclose output totals. GM spokesman Tom Wickham declined comment in an interview.

113-Day Supply

At the beginning of last month, GM had 627,600 trucks in inventory, enough to supply U.S. dealers for 113 days, according to the latest figures from trade publication Automotive News. Analysts consider a 60-day supply normal.

When GM puts an eighth assembly plant on a shortened schedule beginning March 10, the daily losses will run to about 5,400 vehicles. GM has said the plants will remain closed, or on reduced schedules, indefinitely until Detroit-based American Axle resolves the strike. The walkout began Feb. 26 over wage, health-care and pension issues.

American Axle held negotiations with United Auto Workers leadership yesterday, and the talks are expected to continue this weekend, spokeswoman Renee Rogers said in an interview.

GM, American Axle and other suppliers may be put on CreditWatch should the work stoppage ``drag on more than another week or so,'' S&P debt analyst Robert Schulz said yesterday in a note. S&P rates GM's debt B, or five steps below investment grade.

GM has halted production at large pickup and sport-utility vehicle plants in Ohio, Michigan, Indiana and Ontario. The automaker doesn't provide its production totals for the Hummer H2 plant in Mishawaka, Indiana, or joint-venture plants in Ingersoll, Ontario, and Fremont, California.

Shares, Bonds

GM fell 39 cents, or 1.7 percent, to $21.96 yesterday in New York Stock Exchange composite trading, for a seventh consecutive decline and a 22-month low.

American Axle gained $2.13, or 11 percent, to $22.28, after a report from KeyBanc Capital Markets said the supplier may save $50,000 annually per worker following the strike.

GM's 8.375 percent note due July 2033 fell 0.94 cent to 75 cents on the dollar, yielding 11.41 percent, according to Trace, the NASD's bond-price reporting service. It is the lowest price for the note since June 2006.

Credit-default swaps on GM debt reached their highest price since April 19, 2006, gaining 53 basis points to 1,130 basis points, according to CMA Datavision in New York. The contracts are designed to protect bondholders against default. An increase in price indicates a decline in the perception of a company's credit quality.

Dollar Falls to Record Against Euro as Economy Nears Recession

Dollar Falls to Record Against Euro as Economy Nears Recession

By Bo Nielsen and Ye Xie

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The dollar fell to a record against the euro and to an eight-year low compared with the yen as the U.S. lost jobs for the second straight month in February, adding to concern that the economy is in a recession.

The U.S. currency fell for the fourth straight week against the euro as the labor report bolstered speculation the Federal Reserve will cut interest rates by 0.75 percentage point to 2.25 percent this month. The euro gained after European Central Bank President Jean-Claude Trichet held rates at a six-year high of 4 percent and said there is ``strong upward pressure on inflation,'' signaling he's in no hurry to cut rates.

``The news of the U.S. economy is unremittingly bleak,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. ``The dollar looks under pressure.''

The dollar touched $1.5459 per euro yesterday, the weakest level since the euro's debut in 1999, before recovering to trade at $1.5355, for a 1.2 percent drop this week. The U.S. currency traded at 102.67 yen, after falling to 101.43 yen yesterday, the lowest since January 2000.

The dollar also sank to a historic low of 1.0135 Swiss francs after the government said the U.S. lost 63,000 jobs in February, following a drop of 22,000 in January. The median estimate in a Bloomberg survey was for a gain of 23,000 last month.

Europe's 15-nation currency reached an all-time high of 76.92 U.K. pence and set a record high versus the dollar in eight of the past nine trading days.

`Sinking Into Recession'

``There is the view that we're quickly sinking into recession and that the Fed only has a limited ability to offset that,'' said Michael Woolfolk, senior currency strategist in New York at the Bank of New York Mellon Corp. the world's largest custodial bank with over $20 trillion in assets under administration. ``We will certainly see more dollar weakness from here.''

In a bid to counter a deepening credit crisis, the Fed on March 7 boosted the size of auctions of four-week funds to banks planned for March 10 and March 24, to $50 billion each from $30 billion previously. The Fed also said it will make $100 billion available through repurchase agreements.

Futures show traders see a 92 percent chance the Fed will lower its target rate to 2.25 percent on March 18. The balance of bets is on a cut to 2.5 percent, from 3 percent now.

Momentum Gauge

The euro's 14-day relative strength index, a gauge of the speed of the currency's rally against the dollar, was above 70 for the eighth straight day yesterday, signaling the euro may be poised to decline. The last time the gauge held above 70, the five days ended Nov. 26, the euro fell about 3 percent against the dollar in the following three weeks.

``The market has gone a long way without taking a breath,'' said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``It needs to take a break.''

The euro has gained 17 percent against the dollar in the past year, undermining European exports. The synthetic euro, which estimates the European currency's value before its inception in 1999, advanced to the strongest level since at least January 1989, when Bloomberg's data on the measure began.

``Excessive moves are undesirable for growth,'' Trichet said at an event in Paris on March 7. ``I approve the strong dollar policy of authorities'' in the U.S.

Bullish on Yen

The dollar has dropped 12 percent against the yen in the past 12 months as the worst housing slump in 25 years caused $181 billion of credit losses and writedowns at banks, driving the economy toward a recession.

The Standard & Poor's 500 stock index fell 2.8 percent this week, bringing its loss this year to 11.9 percent, in a sign that investors are pulling back from higher-yielding assets and reducing so-called carry-trade bets funded with cheap loans in Japan. The Bank of Japan kept benchmark rates at 0.5 percent, compared with 4 percent in the euro region.

Central banks in New Zealand and the U.K. held rates at 8.25 percent and 5.25 percent this week, respectively, amid growing inflation pressures. Australia's central bank lifted rates 0.25 percentage point to 7.25 percent, while the Bank of Canada cut benchmark borrowing costs a half-point to 3.5 percent.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 56,285 on March 4, a four-year high and compared with 34,289 a week earlier, figures from the Washington-based Commodity Futures Trading Commission showed yesterday.

Barclays Capital Inc., BNP Paribas SA, Morgan Stanley and Standard Chartered Plc cut their dollar forecasts against the euro this week. Credit Suisse Group said the yen will rise to 98 per dollar in three months from a prior forecast of 103.

Fed May Delay Reversal of Cuts as Payrolls Decline

Fed May Delay Reversal of Cuts as Payrolls Decline

By Craig Torres

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The Federal Reserve may keep lowering interest rates, and postpone the ``rapid reversal'' of reductions that officials discussed in January, as the housing rout erodes hiring and spending.

Yesterday's employment report, showing the economy lost 85,000 jobs in the first two months of 2008, altered economists' and traders' expectations for how much the Fed will cut rates and how long it will hold them down.

Increasing signs the U.S. is in a recession, along with a further deterioration in credit markets, spurred traders to bet the Fed will cut its benchmark rate as low as 1.75 percent by June. The weakening housing and labor markets are also putting pressure on the Bush administration to do more to stem the surge in foreclosures and ease a shortage of cash in money markets.

``The economy faces considerable headwinds and rates will have to stay low,'' said Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington. ``Weakness in payroll growth, falling confidence, declining wealth, and tighter credit conditions all add up to a weak outlook.''

Macroeconomic Advisers and JPMorgan Chase & Co. analysts changed their Fed rate forecasts to a three-quarter-point cut from the present 3 percent at the March 18 meeting. They previously expected a half-point move. Banks including HSBC Holdings Inc. and Goldman Sachs Group Inc. also lowered their predictions for this year.

Response to `Crash'

``The Fed's doing what it can,'' Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, said in an interview in Paris. ``It's very limited what monetary policy can do in the wake of a once-in-many-decades housing- price crash.''

Fed officials themselves acknowledged the limits this week, even as they announced a new effort to inject funds into the banking system to offset a deeper credit crunch.

``We are placing too much burden on monetary policy in dealing with financial crises,'' Kansas City Fed Bank President Tom Hoenig said in a speech in Rio de Janeiro today. ``We need to place more emphasis on other macro policy options to deal with the economic consequences.''

The Treasury Department, which has opposed the use of taxpayer money to shore up the housing industry, is talking to banks, other regulators and community advocates about further steps to curb foreclosures.

`Additional Solutions'

``Conversations are confidential, but I am impressed that they are looking for additional solutions to the problem,'' said John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington.

Congressional Democrats have pushed the Bush administration to step up its response, proposing the use of government funds to purchase distressed mortgages. Bond traders this week speculated the government may guarantee mortgage-backed debt issued by Fannie Mae and Freddie Mac, though Treasury spokeswoman Jennifer Zuccarelli today rejected the idea.

Fed officials also indicated that further initiatives are needed to alleviate the housing slump.

Chairman Ben S. Bernanke, 54, this week said ``more can and should be done'' by lenders to avert foreclosure. He recommended ``principal reductions that restore some equity for the homeowner.''

Boston Fed President Eric Rosengren, who researched credit crises in New England and Japan in the 1990s, said falling home prices are locking distressed borrowers out of refinancing options.

Cost of Delay

``There may be a significant cost to delaying needed actions that could restore confidence in the ratings process, the pricing of financial assets, and the impact of declining house prices,'' Rosengren said March 6.

Nationally, home prices fell 9 percent in the fourth quarter from a year earlier, the biggest decline in 20 years of record-keeping, according to the S&P/Case-Shiller home-price index. Economists at Lehman Brothers Holdings Inc. forecast prices will decline another 10 percent.

So far, Treasury Secretary Paulson has embraced private- sector solutions such as a voluntary loan modification program. Democrats have faulted the Hope Now alliance of mortgage lenders for failing to do enough to stop record foreclosures.

``People need help now -- not just `Hope Now,''' Senate Banking Chairman Christopher Dodd, a Connecticut Democrat, said in a statement this week. ``The administration, whose lax oversight led to this crisis, has put only a flimsy plan in place that failed to offer enough.''

`Rapid Pace

For the Fed, the deepening housing crunch means officials may need to postpone a future battle against inflation. At the Jan. 29-30 meeting, some officials considered the central bank might need to raise rates in a ``rapid reversal'' when the economy recovers, minutes of the gathering showed Feb. 20.

Chicago Fed President Charles Evans said last week that taking back rate-cut ``insurance'' can make clear that the Fed is committed to containing inflation. By contrast, New York Fed President Timothy Geithner yesterday stressed that ``monetary policy may have to remain accommodative for some time.''

``They want markets to believe rates will be low for long,'' said Bruce Kasman, chief economist at JPMorgan in New York.

The Grim Reality of Economic Truths

The Grim Reality of Economic Truths

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It is always good to know as a citizen that your leaders think everything is under control, for this reason I can only begin to imagine the relief people in the United States must feel when President Bush publicly acknowledges; "I believe that our economy has got the fundamentals in place.² I must admit however that I struggle to understand where the president is getting his data from and I dread to think what things will look like by the time he admits that ³fundamentals² are not really ³in place². According to Alan Greenspan "as of right now, U.S. economic growth is at zero², ³home prices will continue to weaken² and a boom in oil prices is going to "go on forever". As he puts it, the US is ³clearly on the edge."

I remember the time when General Motors Corp. was considered a pillar of the American dream, a fundamental of the economic miracle. Now, after reporting a quarterly loss of $722 million, compared with a profit of $950 million a year earlier, and offering buyouts to all of its 74,000 United Auto Workers employees, GM is clearly not a part of the sound fundamentals which President Bush likes to describe. The same seems apparent with MGIC Investment Corp., the largest U.S. mortgage insurer, which posted a record quarterly loss of $1.47 billion and is also being kept out of the ƒpresidential fundamentals equation¹.

Things are so bad in the United States that during the Senate Banking Committee hearing, Treasury Secretary Henry Paulson resorted to aliens from outer space to describe how things are looking; "If someone came down - a man came down from Mars - and you were trying to explain the regulatory structureĆ  it's a patchwork quilt, in many ways." I don¹t blame him for looking for such far fetched metaphors when many economists and banking industry experts according to Time magazine, ³believe the subprime crisis could metamorphose into the biggest debacle to hit the sector since the Savings & Loan catastrophe of the 1980s, which caused some $500 billion in losses to the banking industry." As Merrill Lynch economist Kathy Bostjancic elaborates ³the impact here could be far larger (than the S&L crisis) in terms of the dollar amount and the spillover effects into other parts of the economy, particularly the consumer."

Doug Duncan, chief economist with the Mortgage Bankers Association, in his updated 2008 forecast says "the principal concern of the current credit crisis lies in the possibility that banks will eventually run out of capital," as Dean Baker, co-director of the Centre for Economic and Policy Research, a Washington think tank, adds, "the amount of debt that's likely to go bad is virtually certain to be in the high hundreds of billions of dollars, and it wouldn't surprise me if it ends up crossing a trillion."

In short, what we have here is the worst housing slump in a quarter century, an economy which in January alone lost 17,000 jobs, and The Standard & Poor's 500 Index which has fallen three consecutive months, the longest losing streak since 2003. We also have Americans whose December monthly expenditure on debt service, housing, medical costs, and food and energy bills has risen to an unprecedented 66.9 percent of their total spending, the highest since records began in 1980. According to Ron Blackwell, chief economist at the AFL-CIO, "American workers are suffering a generation-long decline in living standards and rising economic insecurity." To add to this, the four-week moving average of new claims for state unemployment is at the highest level since October 2005, and the University of Michigan¹s consumer sentiment index is marking its lowest point since February 1992 when the economy was emerging from a recession.

I would like to know what the president¹s fundamentals are. The White House seems to be isolated from reality. Data provided by the Mortgage Insurance Companies of America trade group clearly states that U.S. foreclosure rates have risen to their highest since at least World War II, and defaults on privately insured U.S. mortgages have risen 37 percent in December from the same month a year earlier. RealtyTrac Inc. is reporting that foreclosure rates have risen 75 percent in 2007, and the number of homes that have been repossessed, or taken back by the bank, have jumped 50% nationwide last year. According to The National Association of Realtors Pending Home Sales Index, pending sales of previously owned homes have fallen a steeper-than-expected 1.5 percent in December, and prices of existing U.S. single-family homes have slumped 8.9 percent in the fourth quarter versus a year earlier, the largest decline in the 20-year history of a national home price index. The National Association of Realtors has also reported that sales by homeowners have fallen in January to their lowest reading since the group began reporting annual sales pace in 1999, something which Northern Trust chief economist, Paul Kasriel describes as ³more doom and gloom."

To add to this, home prices continued their plunge during the last three months of 2007, setting a real estate trade group's record for the biggest-ever quarterly drop, the steepest ever recorded by the National Association of Realtors (NAR), which has been compiling the report since 1979. A Merrill Lynch report in January forecasted price declines of 15% in 2008 and another 10% in 2009 before markets begin to recover. On top of this, mortgage applications volume tumbled 22.6 percent during the week ending Feb. 15 according to the Mortgage Bankers Association's weekly application survey, while Standard & Poor's Ratings Services said its rating outlook on US homebuilders remains emphatically negative and it believes a recovery is not yet in sight, as six of the nation's largest mortgage lenders have temporarily stopped foreclosure proceedings, in a joint effort to cool the raging foreclosure crisis through a project known as Project Lifeline.

Things are so bad in the housing sector, a sector which one would deem as part of the fundamentals of a sound economy, that in a conference call with analysts, Kenneth Lewis, the chief executive of Bank of America, pointed out that more borrowers appear to be giving up on their homes as prices fall, noting a "change in social attitudes toward default." Not surprising considering that CIBC World Markets forecast U.S. house prices will end up sliding 20% before the market stabilizes, and estimates 50% of U.S. homeowners who took out below-prime mortgages in 2006 will end up owing more than their house is worth. As Michael Englund, chief economist at Action Economics put it, "there seems to be a sense of a very deep-seated collapse in the economy."

The Philadelphia Federal Reserve's index of manufacturing activity in the U.S. Northeast also indicated the same disparity between Bush¹s sound fundamentals statement and reality, showing the manufacturing sector in the key heartland of the US is suffering its lowest output for seven years. "As far as this indicator is concerned, a recession, and a severe one at that, is already underway," said Paul Ash-worth, of Capital Economics. For Merrill Lynch, the collapse in the outlook for activity six months out was even more worrisome since it posted the steepest decline in the 40-year history of this report.

America¹s "new business cycle" which began in the 1980¹s has created as Thomas Palley ex Chief Economist with the US-China Economic Security Review Commission puts it, large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth. It has used financial booms to support debt-financed spending, an easing of credit standards to support borrowing, and cheap imports to ameliorate the effects of wage stagnation. As Palley puts it, with "debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.²

According to the New York Times, the sound fundamentals Bush likes to refer to, are alarmingly parallel to the ³Japan¹s lost decade², when the Japanese economy after a long boom in the 1990¹s, was stopped by a sharp fall in the real estate market causing a stretch of stagnation which ended only a few years ago. Clyde V. Prestowitz, president of the Economic Strategy Institute in Washington, says ³the American economy is very fragile now," a sentiment which is echoed by Nouriel Roubini, an economics professor at the Stern School of Business at New York University, who warns that "the roughly $100 billion in bad loans reported by banks to date could increase nearly tenfold, as the defaults spread beyond the subprime mortgage loans to consumer loans, credit cards and corporate lending."

European Central Bank council member Guy Quaden points out that "it is clear that the slowdown in the U.S. will be more pronounced than previously foreseen." According to Bank of Italy governor, Mario Draghi, in the meeting held in Tokyo by the finance ministers and central bank chiefs of the Group of Seven industrialized nations, "Bernanke said that while house prices are falling, they can't say how long and deep the crisis will be." But as lawmakers, politicians and bankers continue to debate about the current state of the American economy, what is clear is that the latest consumer price index (CPI), the government's main inflation indicator shows that for the year ending in January, all prices were up 4.3 percent. Excluding the temporary surges after Katrina, inflation hasn't been higher since July 1991. As for the producer price index, year over year the PPI is up 7.4% the fastest pace since 1981. As Robert Brusca, chief economist at FAO Economics says, with this data at hand, ³it will be hard for Mr. Bernanke to testify...and hold to the fiction of inflation as under control and the Fed as master of tamed inflation expectations." Yet Bernanke is telling lawmakers that `²inflation expectations appear to have remained reasonably well anchored,² and George Bush is convinced that fundamentals are in place.

As for now, while talk of subprime exposure has diminished, Ted Wieseman, an economist at Morgan Stanley, warns that ³investor worries about potential further writedowns are shifting in a big way from subprime residential mortgages to commercial real estate lending.² Also as major retailers reported chilly January same-store sales, Wal-Mart with a meager 0.5% increase, Target with a 1.1% drop, Macy's with a worse-than-expected 7.1% decline, Kohl's with an 8.3% plunge and Nordstrom with a 6.6% drop in comps, the National Federation of Independent Business said its index of small business optimism slipped to the lowest reading since January 1991, when the U.S. was mired in recession.

To add to this economic and social carnage, Macy's Inc. has reported that it plans to cut 2,300 jobs across the country, Hasbro Inc the second-largest U.S. toy company, expects a 14 percent to 15 percent increase this year in the costs of made-in-China products, Time Warner has reported a 41 percent decline in fourth-quarter profits, Office Depot a 85% plunge in profit, and Jeffrey Garten, professor of international trade and finance at Yale School of Management has said that the United States "is beginning to look like a bargain-basement."

Of course, if the world¹s economic engine looking like a bargain-basement is a reflection of sound fundamentals, then I must accept my misreading of today¹s economic reality and subscribe to George Bush¹s sound fundamentals equation.

Sharp Drop in Jobs Adds to Grim Picture of US Economy

Sharp Drop in Jobs Adds to Grim Picture of US Economy

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Washington - The worst fears of consumers, investors and Washington officials were confirmed on Friday, as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.

In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.

Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.

In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation's banking system this month - with more to come after that - by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.

Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.

"Godot has arrived," wrote Edward Yardeni, who had been one of Wall Street's most relentlessly upbeat forecasters. "I've been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy."

The convulsions in the credit markets were spurred in part when Thornburg Mortgage, one of the nation's biggest independent mortgage lenders, and Carlyle Capital, the offspring of one of the country's largest private equity firms, failed to meet demands by lenders to post more cash or pledge other assets, also known as margin calls, on debts that had been backed by packages of mortgages.

Fed officials said Friday that they were not pumping money into the system in response to the poor jobs data but rather to the growing unwillingness or inability of investors to finance even routine business deals. Fed officials have long feared that anxiety about credit losses would create a "negative feedback loop," or self-perpetuating spiral of rising unemployment, more home foreclosures and yet more credit losses.

"You have big credit losses that make it harder to get new credit, which means the economy starts to slow down and foreclosures go up," said Nigel Gault, a senior economist at Global Insight, a forecasting firm. "Then you get even bigger credit losses, which makes banks even less willing to lend and you keep spiraling down."

The Fed's problem is that its main weapons against a downturn - lower interest rates and easier money - are ill suited to a crisis that stems from collapsing confidence about credit quality.

Even though the central bank sharply cut short-term interest rates twice in January and clearly signaled that it would cut them again on March 18, rates for home mortgages have risen and rates for many forms of commercial loans have jumped sharply.

"There has been a tug of war under way between deteriorating credit conditions and monetary policy," wrote Laurence H. Meyer, a former Fed governor and now a forecaster at Macroeconomic Advisers. As a result, he said, credit conditions have remained almost as tight as ever.

The darkening economic outlook, coming just nine months before presidential elections, puts enormous pressure on President Bush and could pose a problem for Senator John McCain, the presumptive Republican nominee for president. Typically, the party in power has not been able to hold onto the White House when the economy is in a recession in an election year.

President Bush, in a hastily arranged appearance before television cameras on Friday afternoon, acknowledged that the economy had slowed but predicted that it would get a lift this summer from the $168 billion stimulus package of tax rebates and temporary tax cuts that Congress recently passed.

"Losing a job is painful, and I know Americans are concerned about the economy," Mr. Bush said.

"The good news is, we anticipated this and took decisive action to bolster the economy, by passing a growth package that will put money into the hands of American workers and businesses."

Edward P. Lazear, chairman of President Bush's Council of Economic Advisers, said the White House had downgraded its earlier forecasts but still believed that the tax rebates of up to $1,200 for many families will help the economy escape a recession.

"There is no denying that when you get negative job numbers, realistically the economy is less strong than we had hoped it would be," Mr. Lazear said. "The question is how quickly will it pick up. We think it will pick up - as I mentioned, we think it will pick up by the summer."

Few private forecasters were so buoyant. Many firms had already concluded that a recession was under way. Within minutes of the new report on employment, many in the dwindling pool of optimists changed their positions.

Mr. Yardeni was hardly alone. Just one minute after the Labor Department published its report at 8:30 a.m., JPMorgan Chase reversed its stance, declaring that a recession appeared to have begun. Lehman Brothers switched its position as well.

Unemployment typically starts to rise only after a recession has started, and it keeps climbing for many months after the economy has hit bottom and begun to recover.

Paul Ashworth, an economist at Capital Economics, noted that private-sector payroll employment has now declined by an average of 47,000 a month - a decline that has been followed by a recession every time it has happened in the last 50 years. In each of those recessions, Mr. Ashworth added, the job market recovered only after monthly job losses peaked at 200,000 jobs.

Ben S. Bernanke, chairman of the Federal Reserve, had already sent clear signals in recent weeks that the central bank was ready to reduce the overnight federal funds rate when policy makers meet on March 18.

Since August, the Fed has sharply cut overnight rates five times, to 3 percent from 5.25 percent, and investors have been all but assuming that the central bank would reduce them by at least another half a percentage point, and perhaps three-quarters of a point, at the next meeting.

But by Thursday, Fed officials had become increasingly alarmed that rates for many kinds of lending were skyrocketing as investors demanded steep risk premiums that are normally associated with a serious economic recession.

What particularly alarmed Fed officials was that the margin calls on Carlyle Capital and Thornburg Mortgage had stemmed from plunging confidence about the value of highly conservative mortgages that were guaranteed by Fannie Mae and Freddie Mac, the giant government-sponsored mortgage companies.

If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that home sales and housing prices could plunge further and foreclosures could climb even higher than they already have.

On Thursday, the Mortgage Bankers Association reported that about 7.9 percent of all loans - a record high - were past due or in foreclosure. Until the third quarter of last year, the rate had not climbed above 7 percent since 1979.

Home prices are falling in almost every part of the country, a phenomenon that Fed officials and many other experts until recently thought was all but impossible, and some analysts now predict that average home prices will ultimately fall 20 percent from their peak in 2006.

The effect is reducing household wealth. According to data this week from the Fed, net household wealth declined by $900 billion in the fourth quarter of last year.

Indeed, the ratio of homeowners' equity to the value of their homes fell below 50 percent for the first time in history last year, according to the Fed. Far more alarming, however, is that about 30 percent of all homes bought in 2005 and 2006 are "under water," meaning they have mortgages that are higher than their resale value.

"We're at the beginning of the bursting of the housing bubble," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research organization in Washington. "The rate of foreclosures is just going to increase as time goes on."

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, noted that the housing calamity thus far has occurred even though unemployment is still low, at just 4.8 percent. But a surge in joblessness would almost certainly lead to more foreclosures and more downward pressure on home prices.

"A downside risk that we do need to consider is whether a rising unemployment rate generated by slow growth will force some people to sell their houses, creating further downward pressure on housing prices," Mr. Rosengren said in an interview.

In opening up its monetary spigots on Friday, the central bank left little doubt that it wanted to increase the money for mortgage lending.

Its first move was to offer up to $100 billion through the Term Auction Facility, a program created in December that allows any bank or savings and loan to bid for loans at what amounts to wholesale rates and allows them to pledge a wide variety of securities - including mortgage-backed securities that are not tradable at the moment - as collateral.

The central bank's other new initiative is to lend an additional $100 billion in March through its open-market operations. That money is available only to primary dealers, a few dozen major investment banks, but the loans can be secured by certain mortgage-backed securities, like those issued by Fannie Mae or Freddie Mac.

Fed officials said they were prepared to infuse even bigger sums of money into the financial system if they see a need, and the central bank said it was in "close consultation with foreign central bank counterparts" - a hint that it might seek support from other central banks if the credit problems persist.

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Job Losses Suggest Economy Is in Recession
By Kevin G. Hall
McClatchy Newspapers

Friday 07 March 2008

Washington - Recession fears mounted Friday after new data showed that employers shed 63,000 jobs in February and a private-sector index pointed to sagging consumer confidence amid sinking stocks and rising prices for oil and gasoline.

For the second consecutive month, employment was in negative territory, a trend most often associated with recession. The Bureau of Labor Statistics also issued a new count of how many non-farm payroll jobs were lost in January, boosting it from 17,000 to 22,000 positions.

The losses stood in stark contrast to the forecasts of most mainstream economists, who'd predicted an increase of about 25,000 jobs in February.

The steep job losses brought President Bush out for a statement in front of White House cameras. He signaled that he's aware of the fiscal hardships that Americans face and said that last month's economic stimulus package, including tax rebates to consumers, should improve the economy in coming months.

"I know this is a difficult time for our economy, but we recognized the problem early and provided the economy with a booster shot," the president said. "We will begin to see the impact over the coming months."

Afterward, a Treasury Department statement sought to talk up the economy. With oil hovering around $105 a barrel and the cost of wheat, corn and other commodities driving up food prices, the Treasury stressed that the core inflation rate remained contained at 2.5 percent.

It was an odd choice for positive news, since core inflation doesn't include the high prices in the volatile food and energy sectors. In effect, this measure of inflation ignores the record prices that Americans are paying at the gas pump and the grocery store. The latest reading of the consumer price index, which measures what Americans pay at the cash register, was almost double the core rate and stood at 4.3 percent for the12-month period that ended in January.

While Bush and the Treasury Department avoided using the "R" word - recession - the head of the president's Council of Economic Advisers left open that possibility.

"We are going to have a weak-growth quarter, and whether you call that a recession or not is something that we won't know for many months," Ed Lazear, the council's chairman, said at the White House.

Many economists disagreed.

"Sure looks like a recession, with exports remaining the only bright spot in the U.S. economy," John Silvia, chief economist for Charlotte, N.C.-based Wachovia, said in a note to investors.

Later, in announcing a conference call to revise their forecast, Wachovia's economic researchers wrote: "We now expect the U.S. has entered its first recession in seven years, as economic activity likely contracted in the first quarter."

Nigel Gault, chief U.S. economist for forecaster Global Insight in Lexington, Mass., was equally blunt.

"The debate should no longer be about whether there is or is not a recession, only about how deep it will be," he told investors. "Private employment has now fallen for three months in a row, according to today's new data, with the steepest decline in February."

Billionaire investor Warren Buffet, considered the richest man in the world, said Monday that the U.S. economy already was in what would be a short recession.

A textbook definition of recession is two consecutive quarters of negative economic growth. Recessions are dated after the fact by the National Bureau of Economic Research, which defines recession as a significant decline in economic activity spread across the economy and lasting over several months.

Friday's dismal jobs report makes it more likely that the Federal Reserve will slash interest rates again at its March 18 meeting in a bid to prevent or shorten a recession.

Wall Street, through the futures market, is expecting a three-quarters of a percentage point cut, which would bring the benchmark federal funds rate to 2.25 percent. Banks would follow suit by lowering the prime rate to 5.25 percent.

Stocks dipped yet again Friday. The Dow Jones Industrial Average fell 146.70 points to close at 11,893.69. The S&P 500 was off 10.97 points to close at 1293.37, while the NASAQ was down 8.01 points to 2212.49.

The job losses aren't yet in the hundreds of thousands associated with deep economic turndowns. But job losses in consecutive months seldom happen outside of recessions. The last such consecutive months of falling employment were in May and June 2003, when the economy wasn't in recession.

Jobs also are a lagging indicator, providing a snapshot of past business activity. And since recessions aren't called until the economy has been in one for months, the dour job numbers clearly point to an economy that already was slowing drastically when growth braked to just 0.6 percent during the final three months of 2007.

Problems in housing dominate headlines, but until late last year the broader economy was in strong shape. Deepening problems in financial markets, however, have dried up lending for businesses and consumers.

And consumers have pulled back since they've seen their wealth evaporate as the stock market and home prices drop like stones. The RBC Cash Index, a survey of consumer attitudes and spending by household, fell to 33.1 percent in its March reading, announced Friday. That's the lowest since the index was created in 2002.

Friday's jobs report gives a snapshot of which sectors of the economy are struggling. Private-sector employment fell by 101,000 jobs, and the overall picture would have been far worse if not for robust hiring by federal, state and local governments.

Manufacturing led the employment losers, shedding 52,000 jobs in February and almost 300,000 jobs over the past 12 months. Construction employment fell by 39,000 posts and retail employment dipped by 34,000 positions.

Among industries that were hiring, government employment was up by 38,000 jobs, the health-care industry added 36,000 posts and the leisure and travel sector added 21,000 payroll jobs.

The nation's unemployment rate dipped a tenth of a percent to 4.8 percent as more workers exited the economy. It's measured independently of the employment report.

In separate news Friday, the Federal Reserve announced that it would make $100 billion in short-term loans available through two auctions this month. This Trade Auction Facility is a new creation by the Fed that allows banks to bid on short-term loans that have low interest rates. The Fed had been offering $60 billion a month but has upped that to $100 billion to keep banks offering short-term credit to corporations.