02 December 2008

Stuff Splattering in Every Direction

Even Bernanke can't say what's next

The bad news is that the US has already been in recession for nearly a year. Worse still, the bottom isn't yet in sight, prompting another massive selloff yesterday on Wall Street. The rout came amid fresh evidence that factory activity is in retreat, and a grim acknowledgment from Federal Reserve Board chief Ben Bernanke that even he doesn't know how long this will last. "The uncertainty surrounding the economic outlook is unusually large," he said. The National Bureau of Economic Research - the official arbiter of US recessions - made it official by declaring that the post-2001 expansion ended abruptly in December 2007, and the economy has been in retreat ever since. "The committee determined that the decline in economic activity in 2008 met the standard for a recession," the NBER said in a statement. A recession is typically marked by two consecutive quarters of declining gross domestic product, which hasn't happened yet. But the NBER looks at an array of economy-wide measures. These include GDP, payroll employment, gross domestic income, real personal income, real manufacturing sales, wholesale and retail sales, factory output and household employment. The news confirmed what economists have been saying for months, based on analyzing previous slumps. Still unclear is how much longer and deeper the economy will slide.

There is new, disturbing evidence that worse may still be ahead, even a year into the recession. A key measure of manufacturing activity in November fell to its lowest level in 26 years. The Institute for Supply Management's monthly manufacturing index fell to 36.2 from 38.9 in October, the worst reading since the 1982 recession. The index was dragged down by a steep reported drop in factory orders. "The current reading reaffirms the emerging consensus that the current slump will be one of the harshest in the post-World War II era," said economist David Resler of Nomura Securities. Bernanke suggested the central bank would do whatever it takes to stop the spillover effect from the financial crisis to the broader economy, including shielding large financial institutions from collapse. He pointed out that with the Fed's key short-term interest rate already at 1%, there's now limited room to cut more. The Fed meets again Dec. 16 and most analysts expect another rate cut of half a percentage point. But Bernanke said the bank will continue to use unconventional means to keep money coursing through the banking system, including buying up longer-term Treasury bills as well as the debts of mortgage lenders Fannie Mae and Freddie Mac. Down the road, Bernanke said the Fed would have to worry about the inflationary impact of all that liquidity, but not now.

In related news, CIBC World Markets has said that as the US faces its biggest budgetary deficit since the end of the Second World War, taxpayers will be faced with years of future liabilities and inflation that will drive down the value of the US dollar. Yet the stimulus measures that are the prime source of this expanded deficit will do nothing to restore the deeply troubled North American auto industry to long-term viability, said CIBC World Markets chief economist Jeff Rubin. Even before a substantial stimulus package expected from president-elect Barack Obama, the US Treasury market will need to finance US$1.5 trillion of new debt, if not more, pushing the federal deficit to 11% of the country's total economic output. The tempting shortcut will be to "reflate" the US economy by pumping money into the system, Rubin said in the report, titled The Printing Press. "The resulting higher inflation allows the government to pay off bondholders with coupons that have less and less buying power every year," said Rubin. "And while the bonds mature at par, inflation will have eroded much of their real value." Government bailouts won't cure the auto industry, however, whose problems run far deeper than being able to compete with imports, the CIBC report said. The end of cheap credit and rising gasoline prices are fundamentally altering the domestic market, which is geared to produce 15 to 20 million vehicles for a market where demand is falling to 10 million units.
(Vancouver Sun, Globe and Mail 081202)

UN: Global stimulus needed

The United Nations called for governments around the world to undertake massive stimulus packages in order to deal with the impact of a global economic downturn. The world body's economists forecast in a new report that the dollar and world per capita income will continue to drop in 2009. The report predicts that export growth and capital inflows will decline and borrowing costs for developing countries increase in 2009. The Global Outlook Report calls for “massive economic stimulus packages that are coherent and mutually reinforcing on a global basis, and linked with sustainable development imperatives.” The packages “should come on top of the liquidity and recapitalization measures already undertaken by countries in response to the economic crisis,” the report added. The report also proposed “stronger regulation of financial markets and institutions, adequate international liquidity provisioning, an overhaul of the international reserve system and a more inclusive and effective global economic governance, to prevent against any future repetition." According to the report, output of developed countries will decline 0.5%, compared with an average growth rate of 5.3% in emerging economies and 4.6% growth in developing countries. Overall global growth will probably not exceed 1% in 2009, compared to 2.5% in 2008, and rates varying between 3.5 and 4% in the four previous years. In the US GDP growth will decline by 1%, the euro zone will drop by 0.7% and Japan by 0.3%. Growth in India, Brazil and Mexico are projected to reach 7%, 2.9% and 0.7%. But the report warns that “given the great uncertainty prevailing today, a more pessimistic scenario is quite possible.”
(Journal of Commerce 081201)

Holy crap. I already have had a bad feeling about everything for some time, but geez the news is getting grim. Prepare for the worst, everyone. The guys in control will be the last to admit how truly dire the situation is, and if they're already conceding that things are rough and only going to get rougher, you can bet that we're in for a world of hurt over the next couple of years - at a minimum.....

Not that they will manage anything properly though. They are all too busy power posturing in Washington and Ottawa to spend any time on real issues.

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