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Thursday 16 October 2008
Signs of a Deeper Downturn in U.S.
Even as the U.S. government and its counterparts around the world readied an ambitious financial bailout, more signs emerged on Wednesday that the economic downturn had taken a darker turn in the United States. PDF
NEW YORK: Even as the U.S. government and its counterparts around the world readied an ambitious financial bailout, more signs emerged on Wednesday that the economic downturn had taken a darker turn in the United States.
Retail sales fell sharply in September as consumers shunned department stores, auto showrooms and shopping malls, ratcheting back spending for a third month. Economic activity slowed, according to a report from the Federal Reserve. And the Fed chairman, Ben Bernanke, warned in a speech that a recovery “will not happen right away.”
Each bleak economic report compounded on the last, and by the end of the day the Dow Jones industrial average had fallen 733 points. Many investors fear that corporations — and by extension their workers and shareholders — will face harder times.
The key troubles lie with the American consumer, who, after months of coping with soaring gasoline prices, is faced with losses in the stock market and an uncertain financial future.
The impact of the crisis on Wall Street put a clear dent in consumer spending. Last month’s 1.2 percent decline in retail sales was the sharpest drop in years, and it came in the back-to-school shopping season, traditionally the busiest time of the year for retailers outside of the December holidays.
The cutback in spending was underscored by the anecdotal reports in the Fed’s “beige book,” a regular survey of businesses around the country. The report found that spending decreased in all 12 metropolitan districts included in the report, and businesses that responded to the Fed complained they “had become more pessimistic about the economic outlook.”
“Normally the beige book has a lot of, ‘On the one hand, on the other hand,’ “ said Ethan Harris, an economist at Barclays Capital. “But all 12 districts weakened. That’s a recession sentence, without using the word.”
Auto dealers and manufacturers were hit hardest, as motor vehicle sales plummeted and orders tapered off at industrial companies. The real estate market remained stagnant and credit was tight. Discount and dollar stores reported more buyers, but sales fell 1.5 percent at department stores.
The slower sales are, in part, a result of the evaporation of common sources of consumer credit, which fueled the growth in consumption in the last decade. That flood of credit now has slowed to a trickle. “You’re beginning to see the deterioration of credit cards, consumer debt, home equity lines,” said Stephen Wood, a strategist at Russell Investments.
And a precipitous decline in consumer spending — the primary engine of economic growth for the last decade — could have dire consequences for the labor market, workers’ salaries and American industry, which would in turn affect countries that are dependent on American demand for their goods.
“There can be no doubt now that the economy is in recession,” Ian Shepherdson of High Frequency Economics wrote in a note. “It will be there awhile.”
The bleak numbers could also spur further interest rate cuts from the Fed, which meets again at the end of the month. Bernanke, in his speech in New York, underscored the bleak outlook suggested by Wednesday’s reports, warning that the economy would face an extended period of difficulty.
Businesses may also be unnerved by signs that the global economy is slowing. Over the last year, as the American economy stumbled, domestic businesses became heavily dependent on foreign sales to prop up their bottom line. A downturn in Europe, coupled with a stronger dollar, could cut off that crucial source of revenue. Even Bernanke cautioned that export sales would slow.
Harris, of Barclays, said: “Trade has been one of the crutches of the economy in the last year. And it’s clearly weakening.”
The retail sales report, released by the Commerce Department, showed that automobile sales fell about 4 percent last month. A broad range of products sat unsold in stores as well, including furniture, electronics and clothing, suggesting that Americans were delaying big purchases.
“There is almost nothing positive to say about these figures,” Rob Carnell, an economist at ING Bank, wrote in a note.
Even a sharp drop in gasoline prices did not lure Americans back to the mall. A measure of inflation at the producer level, the Producer Price Index, fell 0.4 percent in September on the back of cheaper oil.
Prices for many other products stayed high; outside of energy products, businesses and wholesalers paid 0.4 percent more for finished goods in September than in August, according to the Labor Department.
In the last year, producer prices are up 8.7 percent; “core” prices, which exclude gasoline and food, rose 4 percent in the last year.
Still, economists suggested that as the economy slowed and oil got cheaper, inflation would be less of a worry. “You’ve got all the ingredients for a big drop in inflation going forward,” Harris said.
A measure of conditions in the manufacturing industry, released by the Federal Reserve Bank of New York on Wednesday, plunged to the lowest level since the survey began in 2001. The Empire State survey dropped to minus 24.6 points as demand for factory orders plummeted in October. The reading was at minus 7.4 in September.
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Signs of a Deeper Downturn in U.S.
By Michael M. Grynbaum
15 October 2008
NEW YORK: Even as the U.S. government and its counterparts around the world readied an ambitious financial bailout, more signs emerged on Wednesday that the economic downturn had taken a darker turn in the United States.
Retail sales fell sharply in September as consumers shunned department stores, auto showrooms and shopping malls, ratcheting back spending for a third month. Economic activity slowed, according to a report from the Federal Reserve. And the Fed chairman, Ben Bernanke, warned in a speech that a recovery “will not happen right away.”
Each bleak economic report compounded on the last, and by the end of the day the Dow Jones industrial average had fallen 733 points. Many investors fear that corporations — and by extension their workers and shareholders — will face harder times.
The key troubles lie with the American consumer, who, after months of coping with soaring gasoline prices, is faced with losses in the stock market and an uncertain financial future.
The impact of the crisis on Wall Street put a clear dent in consumer spending. Last month’s 1.2 percent decline in retail sales was the sharpest drop in years, and it came in the back-to-school shopping season, traditionally the busiest time of the year for retailers outside of the December holidays.
The cutback in spending was underscored by the anecdotal reports in the Fed’s “beige book,” a regular survey of businesses around the country. The report found that spending decreased in all 12 metropolitan districts included in the report, and businesses that responded to the Fed complained they “had become more pessimistic about the economic outlook.”
“Normally the beige book has a lot of, ‘On the one hand, on the other hand,’ “ said Ethan Harris, an economist at Barclays Capital. “But all 12 districts weakened. That’s a recession sentence, without using the word.”
Auto dealers and manufacturers were hit hardest, as motor vehicle sales plummeted and orders tapered off at industrial companies. The real estate market remained stagnant and credit was tight. Discount and dollar stores reported more buyers, but sales fell 1.5 percent at department stores.
The slower sales are, in part, a result of the evaporation of common sources of consumer credit, which fueled the growth in consumption in the last decade. That flood of credit now has slowed to a trickle. “You’re beginning to see the deterioration of credit cards, consumer debt, home equity lines,” said Stephen Wood, a strategist at Russell Investments.
And a precipitous decline in consumer spending — the primary engine of economic growth for the last decade — could have dire consequences for the labor market, workers’ salaries and American industry, which would in turn affect countries that are dependent on American demand for their goods.
“There can be no doubt now that the economy is in recession,” Ian Shepherdson of High Frequency Economics wrote in a note. “It will be there awhile.”
The bleak numbers could also spur further interest rate cuts from the Fed, which meets again at the end of the month. Bernanke, in his speech in New York, underscored the bleak outlook suggested by Wednesday’s reports, warning that the economy would face an extended period of difficulty.
Businesses may also be unnerved by signs that the global economy is slowing. Over the last year, as the American economy stumbled, domestic businesses became heavily dependent on foreign sales to prop up their bottom line. A downturn in Europe, coupled with a stronger dollar, could cut off that crucial source of revenue. Even Bernanke cautioned that export sales would slow.
Harris, of Barclays, said: “Trade has been one of the crutches of the economy in the last year. And it’s clearly weakening.”
The retail sales report, released by the Commerce Department, showed that automobile sales fell about 4 percent last month. A broad range of products sat unsold in stores as well, including furniture, electronics and clothing, suggesting that Americans were delaying big purchases.
“There is almost nothing positive to say about these figures,” Rob Carnell, an economist at ING Bank, wrote in a note.
Even a sharp drop in gasoline prices did not lure Americans back to the mall. A measure of inflation at the producer level, the Producer Price Index, fell 0.4 percent in September on the back of cheaper oil.
Prices for many other products stayed high; outside of energy products, businesses and wholesalers paid 0.4 percent more for finished goods in September than in August, according to the Labor Department.
In the last year, producer prices are up 8.7 percent; “core” prices, which exclude gasoline and food, rose 4 percent in the last year.
Still, economists suggested that as the economy slowed and oil got cheaper, inflation would be less of a worry. “You’ve got all the ingredients for a big drop in inflation going forward,” Harris said.
A measure of conditions in the manufacturing industry, released by the Federal Reserve Bank of New York on Wednesday, plunged to the lowest level since the survey began in 2001. The Empire State survey dropped to minus 24.6 points as demand for factory orders plummeted in October. The reading was at minus 7.4 in September.
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