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Economic Status

Goldman Slashes U.S. Growth Forecasts, Says Recession Deepens Goldman Sachs Group Inc. increased its recession estimates, saying gross domestic product is declining at a 5 percent annual rate in the current quarter and will drop 3 percent and 1 percent in the next two quarters. Unemployment will reach 9 percent by the fourth quarter of 2009, Goldman economists led by Jan Hatzius wrote in a research note today.

U.S. Recession Probably Deepened in October as Consumer Spending Plunged The U.S. recession probably deepened as consumer spending plunged in October by the most since the 2001 downturn and businesses slashed investment, government reports may show this week. Purchases declined 1 percent after a 0.3 percent drop the prior month, according to the median estimate of economists surveyed by Bloomberg News ahead of Commerce Department figures due Nov. 26. Commerce may also report the same day that orders for long-lasting goods fell for the second time in three months. The credit crisis has forced cash-strapped consumers to pull back on purchases and companies to cut spending and step up firings. Housing and manufacturing also are deteriorating, a sign the economy is sinking further into what may be the most severe slump in decades.

Planned job cuts highest in 5 years October was another awful month for jobs. Two key employment reports released Wednesday showed the largest number of planned job cuts in nearly five years, and private sector jobs fell by the largest amount in nearly seven years. Job cut announcements by U.S. employers soared to 112,884 in October, up 19% from September's 95,094 cuts, according to outplacement firm Challenger, Gray & Christmas Inc. It was the highest number of pink slips handed out since January 2004. Layoffs last month were up 79% from October 2007, when 63,114 job cuts were announced. Separately, payroll manager ADP said Wednesday that the private sector lost a seasonally adjusted 157,000 jobs last month, more than six times September's decrease and the largest decrease since December 2001. The dour reports were ominous signs for the jobs market ahead of the Department of Labor's monthly unemployment report on Friday. That report is expected to show that 200,000 jobs were lost in October and that the unemployment rate grew to 6.3% from 6.1% a month earlier. October's numbers bring the total number of planned job cuts to 875,974 in 2008, 14% higher than all of 2007 and the largest 10-month total since 2003. The embattled financial and automaking industries were hit the hardest, as they have been all year. The struggling industries have combined for 239,760 layoffs so far this year, representing 27% of all layoffs in 2008.

Factory Orders Dropped in September The slowing U.S. economy is reducing demand for manufactured goods and will likely prompt further cutbacks in the beleaguered manufacturing sector. Orders for manufactured goods fell 2.5% in September, or $11.2 billion, to $432 billion, the Commerce Department said Tuesday, following a 4.3% drop in August. The drop reflected slackening demand for goods as well as price-related declines in orders for oil and related fuels. Total orders excluding transportation, which economists use to strip out volatility and gauge underlying demand, sank 3.7% in September from the month before, the largest percentage drop in the series' 16-year history. A closely watched measure of business spending -- nondefense capital goods orders excluding aircraft -- fell 1.5% in September, a sign companies are reining in spending, which often precedes layoffs.

U.S. Auto Sales Plunged in October U.S. auto sales in October plunged 32% to their lowest monthly level since 1991. The dismal U.S. auto market took a turn for the worse in October, with sales plunging by about a third as the financial crisis and tightening credit kept buyers away from showrooms. Auto makers sold 838,186 cars and light trucks last month, according to a tally by Autodata Corp. General Motors Corp. said it was the worst October in 25 years. When adjusted for increases in the U.S. population, last month was "the worst month in the post-World War II era," Michael DiGiovanni, GM's top sales analyst, said in a conference call. "This is clearly a severe, severe recession." Auto executives warned that the market could deteriorate further, raising the question as to when the auto industry -- a key driver of the U.S. economy -- will hit bottom. The modest decline in U.S. economic output in the third quarter "is not likely to be the worst we will see in this cycle," Ford Motor Co. economist Emily Kolinski Morris said in a company conference call.A closely watched industry figure, the seasonally adjusted annualized selling rate, was 10.6 million vehicles, compared with 16 million a year earlier, according to Autodata. Ford sales analyst George Pipas said the current sales trend could pull total 2008 sales below 14 million cars and trucks. At the beginning of the year many car companies had expected sales of roughly 15 million vehicles, already below the 16 million annual figure considered to be healthy.

Retail Sales Show Broad Weakness Weak October sales by the nation's retailers presage an austere holiday shopping season and a downturn that could last well into 2009, adding to calls for policy makers to stimulate the economy. The Commerce Department reported Friday that its broad measure of U.S. retail sales dropped by 2.8% in October -- the largest monthly drop since records began in 1992. Sales have fallen for four straight months, a longer streak than during the 2001 recession, with declines worsening each month. As consumers pull back, the threat rises of a deep and prolonged recession. "This sets up a very bad holiday season, with the risk that many stores that flourished over the last several years are going to go bankrupt," said Christian Menegatti, a lead U.S. analyst with RGEMonitor.com, a research and consulting firm. "You can't spend what you don't have. It's just not possible to continue spending if the income growth isn't there." Retail Sales Graphic
Why Some Retailers Are Faring Better

A Sea of Unwanted Imports Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times. For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property. And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril. “This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars. “And it scares you to death.” The backlog at the port is just part of a broader rise in the nation’s inventories, which were up 5.5 percent in September from a year earlier, according to the Commerce Department. The car industry has been hurt particularly, with sales down nearly 15 percent this year. General Motors has said it would run out of operating cash by the end of the year if it does not receive a government bailout. But the inventory glut in Long Beach is not limited to imported cars. There has also been a sharp drop in demand for the port’s single largest export: recycled cardboard and paper products. This material typically goes to China, where it is used to make boxes for new electronics and other products that are sent back to the United States. But Chinese factories reacting to sharply falling demand are slowing production, so they need less cardboard. Tons of paper are piling up recycling businesses around the port, the detritus of economies on hold. Long Beach is an important port, particularly for the West. It is where imported products arrive and filter through the tributary of trucks, trains and retailers into the hands of consumers. But now, products are just sitting.

Credit Problems vs Economy

Bank Clampdown Dogs Economy Banks continue to tighten lending terms for the nation's consumers and businesses, hamstringing the economy and raising the risk of a protracted recession. The Federal Reserve's latest survey of banks' senior loan officers showed that a large majority of the 76 U.S. and foreign-based respondents clamped down on lending in the past three months amid mounting losses and concern about the nation's economy. Also, separate reports Monday showed manufacturing activity slowed, and construction spending fell, though not as steeply as expected. "It means the downturn is likely to be deep and will last longer than anything we've seen in a long time," said Michael Darda, chief economist at Stamford, Conn.-based MKM Partners. "There's still a lot of pain in front of us." Some 95% of banks in the U.S. said they tightened price terms on commercial and industrial loans to large and midsize firms in the past three months, according to the Fed survey. A total of 85% tightened lending standards, compared with 60% in the previous three-month period, which ended in July. Roughly 60% of U.S. banks tightened lending standards on credit-card loans and other types of consumer loans, while about half said they raised the minimum required credit scores for such loans. The survey, which was conducted in October, found that the moves were driven by more pessimistic views on the U.S. economy as well as rising loan defaults in recent months. "This pushes any kind of trough in the economy until late next year," Mr. Darda said, noting that tight credit, falling equity and real-estate wealth and rising unemployment make it unlikely that consumer spending, the largest driver of U.S. economic growth, will rebound soon. Recession Bellweather Graphics

Credit Crisis Indicators Yesterday saw a stunning flight to treasuries across the board. The 3-month yield fell to zero. The 2 year yield was at a record low. Even the 30 year yield decreased sharply. The 3-month at zero can be explained as a flight to quality and another crisis in the credit markets, but the declines in the longer yields probably suggest deflation trades. Here are a few indicators of credit stress once again suggesting little progress over the last few days.

U.S. Bailout Plans Come Under Pressure The U.S. government's financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance. On Monday, mortgage giant Fannie Mae said it is losing money so rapidly it may need a cash infusion from the Treasury Department by year's end. The funds would come from a special $100 billion pool Treasury set aside back in September to aid the company. Fannie Mae had a loss of $29 billion for the third quarter. In another sign of the stress on financial-services companies, American Express Co. won swift approval from the Federal Reserve to become a bank-holding company. The move paves the way for the credit-card giant to get a taxpayer-funded capital infusion from the Treasury. The chorus of calls for help could pressure the Bush administration to widen the scope of its $700 billion bailout plan, the Troubled Asset Relief Program, which was authorized in October.Treasury officials have refused so far to open TARP to U.S. car makers, despite lobbying from Congress to do so. The Treasury has committed all but $60 billion of the first $350 billion in funds granted by Congress under the TARP plan. That sum remains after accounting for Treasury's planned investments in the banking sector and Monday's additional $40 billion investment in troubled insurer American International Group Inc. AIG was originally bailed out by the Federal Reserve in September, and Fannie Mae, along with its sister company Freddie Mac, was seized by the government the same month. The rescue efforts are "evolving in ways that I don't think anyone anticipated," said Camden Fine, president and CEO of the Independent Community Bankers of America, a trade group. "Things are just hitting them from every single direction, every day, and I don't think they know whether to spit or go blind."
AmEx Gets Access to Bailout Fund

What is the Fed to do? This picture from Paul Krugman is deeply troubling. It shows the real interest rates on corporate bonds, with the expected rate of inflation from the spread between 20-year TIPS and 20-year Treasury rates. The Fed is supposed to cut real interest rates as the economy weakens, but the opposite seems to be happening. The problem is that the Fed is close to its zero lower bound on the federal funds rate, perceptions of credit risk are rising, and expected inflation is falling. Indeed, as I pointed out yesterday, people are increasingly concerned about possible deflation. What is the Fed to do (other than pray)? Expectations management is the key.
Here is one idea. Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path. The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation. A credible promise of subsequent price reversal after any deflation ensures that long-term expected inflation stays close to the inflation rate implied by the Fed's target price path. Monetary economists will recognize that this policy is price-level targeting rather than inflation targeting.
A Macroeconomic Puzzle, Treasuries as Negative Beta Assets?

Strategic Situation and Policy 

Economists Search for End of Woes Economists struggling to gauge the depth of the U.S. downturn are turning to more forward-looking clues, such as home-vacancy rates and foreign stock markets. The standard measures of gross domestic product and monthly payroll figures give snapshots of what has happened, but say less about what will happen next. The current downturn is shaping up to be worse than the recessions of 1990-91 and 2001 and the prolonged downturn that ended in 1982. Banks are cutting back on lending, consumers are spending less, companies are shedding jobs amid sinking profits, and the housing bust that triggered the slide persists. Here are five areas economists are watching, and the indicators they are tracking. New Indicator GraphicGet Ready For 'Stag-Deflation' Back in January, I argued that four major forces would lead to a risk of deflation-- or "stag-deflation," where a recession would be associated with deflationary forces--rather than the inflation that mainstream analysts have worried about. They were: (1) a slack in goods markets, (2) a re-coupling of the rest of the world with the U.S. recession, (3) a slack in labor markets, and (4) a sharp fall in commodity prices following such U.S. and global contraction, which would reduce inflationary forces and lead to deflationary forces in the global economy. How has such argument fared over time? And will the U.S. and global economies soon face sharp deflationary pressures? The answer: Deflation and stag-deflation will, in six months, become the main concern of policy authorities. Why? First, the U.S. has entered a severe recession that is already leading to deflationary forces in sectors where supply vastly exceeds demand (housing, consumer durables, motor vehicles, etc.). Aggregate demand is falling sharply below aggregate supply. The unemployment rate is up sharply, while employment has been falling for 10 months in a row. And commodity prices are sharply down--about 30% from their July peak--in the last three months, and are likely to fall much more in the next few months as the advanced economies' recession goes global. So both in the U.S. and in other advanced economies we are clearly headed toward a collapse of headline and core inflation. Is there any doubt about this ongoing inflation capitulation and the beginning of sharp deflationary forces?

When Consumers Capitulate The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent. To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation. Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way. So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time. For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year. The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response. The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off. No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

A long, shaky bridge to recovery The lessons of Japan’s stumbling path out of deflation and recession suggest that government spending can help stave off an extended recession, but it may take years not months and require an unlikely combination of political will and consensus. That’ll be a lot of bridges to nowhere. The particular type of recession the United States faces, a balance sheet one, means that cutting interest rates will be really pretty ineffective, and while you can throw everything you have at saving the banking system, you can’t make people and businesses borrow and put the money to work. They too have their own balance sheet problems, having loaded up on debt and holding as they are assets like real estate and stocks that have fallen in value. Banks too are about to get whacked by another hit to their assets, as corporations respond to newly lousy economic conditions by, well, defaulting. In short, it’s a negative self-reinforcing cycle that low interest rates do little to break and that is bigger, though related, to the problems in the financial system. Government spending can break the cycle. Not tax cuts, which will only go to pay down debt or are saved into a banking system that isn’t working, but actual bricks and mortar. Think the New Deal’s Works Progress Administration super-sized or Japan building highways and bridges over seemingly every river, stream and rivulet. Lessons from Japan’s Great Recession. “I don’t think it will be over quickly. I am recommending at least three to five years seamless medium-term fiscal stimulus measures to give enough time for the private sector to repair its balance sheet.” Three to five years is an eternity in political life. It is an absolute sure thing that incoming President Barack Obama will design and implement a pretty chunky fiscal stimulus package even if President Bush does not pass one in his waning days in office. But think about how difficult it will be to maintain both the will and power to maintain a huge borrow and spend program for several years. Koo thinks that Japan, which was facing a far more serious destruction of assets, derailed its recovery with premature fiscal reform. “If we had known in advance that this kind of recession will never be over until private balance sheets are repaired and fiscal stimulus is needed to keep the economy growing, we could have done it in seven or eight years perhaps instead of 15,” he said.

Obama-Pelosi Billions May Fail to Revive Growth as Slump Defeats Stimulus President-elect Barack Obama and House Speaker Nancy Pelosi may throw as much as half a trillion dollars worth of stimulus at the economy -- and have little or no growth to show for it. The forces arrayed against recovery, including the credit contraction and cutbacks by consumers, are so powerful that they may overwhelm the record sums of spending and tax cuts being discussed in Washington. The only consolation, economists say, is that without the stimulus, things would be even worse. ``It's hard for me to imagine we'll have a return to positive growth before the fourth quarter of 2009, even with a $500 billion stimulus,'' says Barry Eichengreen, an economics professor at the University of California, Berkeley. He sees the unemployment rate rising to 9.5 percent in early 2010, from 6.5 percent now. Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, says the economy may contract 2 percent next year without a package of at least $300 billion. With it, ``we could get growth pretty close to zero,'' he adds. That would still be the worst result since 1991. ``The breadth and potential depth'' of the crisis call for a ``bolder'' approach, Obama economic adviser Gene Sperling said in congressional testimony Nov. 13. A package costing $300 billion to $400 billion ``should be the starting point, with an understanding that more could be needed,'' Sperling said, noting he was speaking for himself. That's one reason why Martin Feldstein, the Harvard University economics professor, now favors a major government program that will directly inject money into the economy instead of depending on consumers. ``I hate to say it, because I'm a guy who doesn't like government spending and doesn't like fiscal deficits, but I don't see any alternative,'' he said in a Bloomberg Television interview Nov. 12.

Obama Aims to Create 2.5 Million U.S. Jobs Amid `Historic' Economic Crisis President-elect Barack Obama said he aims to save or create 2.5 million jobs in a two-year plan to stimulate an economy facing a “crisis of historic proportions.” “It’s likely to get worse before it gets better,” Obama said today in his weekly radio address. He said that this week “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs. The economic slowdown has been exacerbated by the worst credit crisis in seven decades. More firings will weigh on the economy and consumer spending, putting pressure on Obama and Congress to agree on legislation that will stimulate growth. The incoming 44th president is expected to announce, as early as Monday, his economic team, to be headed by Timothy Geithner, head of the Federal Reserve Bank of New York, as Treasury secretary. Others include Jacob Lew, former President Bill Clinton‘s White House budget director, who will serve as National Economic Council director; and Peter Orszag, head of the Congressional Budget Office, who will be the next White House budget director. Obama hailed this week’s enactment of a $6 billion extension of unemployment benefits, and said more needs to be done, and quickly. “We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year,” Obama said. The president-elect’s address was also recorded on video and was posted on the official presidential transition website - - http://www.change.gov/
!!! Obama: "Act Swiftly and Boldly"

What if a Slowdown Is a Never-Ending Story? The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious. The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast. In this situation, the nation faces a real peril: we could reach a state of long-term equilibrium — as economists say — well below full employment. This condition had been thought by classical economists to be impossible to reach. But the Depression taught us that if there is enough fear in the economy, lenders will not lend and economic activity will continue indefinitely at a level consistent with serious recession or even depression. This was John Maynard Keynes’s great contribution to economic understanding, and it’s a big one. Of course, it is contested, as all macroeconomics is, and it may not be the full explanation, but we know from observation that an industrial economy can run well below capacity for a long time. We should be terrified by this prospect. It would mean real suffering for tens of millions of people in America — maybe billions worldwide. In this situation, where fear rules, we must turn to the federal government for relief. The private sector is the patient, not the doctor. Solvency guarantees for banks that lend are a must. No more Lehmans can be allowed to happen. A truly serious stimulus package is very much in order. It has to be big enough and last long enough that Americans do not just sock it away under the mattress. We cannot nickel-and-dime our way out of this. The inflation threat is small in an economy in full credit-collapse mode. There is virtually no dose of stimulus that is too much in an economy as shellshocked as today’s.