President Bush said Thursday, February 28, 2007, that the country is NOT headed into a recession and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts. "We've acted robustly," he said.
MEANWHILE, BACK AT THE RANCH, IN THE REAL WORLD.
The economy skidded to a near halt in the final quarter of last year, clobbered by dual slumps in housing and credit that caused people and businesses to spend and invest more sparingly.
The Commerce Department reported Thursday that the gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter. The reading — unchanged from an initial estimate a month ago — underscored just how much momentum the economy has lost. In the prior quarter, the economy clocked in at a brisk 4.9 percent pace. Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.
"The economy just kept its head above water," said Nigel Gault, economist at Global Insight.
The housing picture looked even more bleak in the new report. Builders slashed spending on housing projects by a whopping 25.2 percent on an annualized basis in the fourth quarter, the biggest cut in 26 years.And, even though economic growth slowed, inflation picked up — an ominous mix that could spell further trouble for the economy.
As if the newly confirmed fourth-quarter GDP figure of 0.6 percent wasn't chilling enough, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market.
Fears have grown that the country is heading for a recession or is already in one. With inflation rising as the economy slows, fears are increasing that the country may be headed for a bout of stagflation. That's a scenario the country hasn't experienced since the 1970s.
WHAT, ME WORRY?
NEWS OF THE DAY FEBRUARY 26, 2008
Inflation at the wholesale level soared in January, pushed higher by rising costs for food, energy and medicine. The monthly increase carried the annual inflation rate to its fastest jump in a quarter century.
The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.
The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years, since prices had risen at a 7.5 percent pace in the 12 months ending in October 1981.
The number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.
Nationwide, some 233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc. Nearly half of the total involved first-time default notices.
The worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions
U.S. home prices lost 8.9 percent in the final quarter of 2007, Standard & Poor's said Tuesday, marking a full year of declining values and the steepest drop in the 20-year history of its housing index.
"We reached a somber year-end for the housing market in 2007," said one of the index's creators Robert Shiller. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak."
The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.
By 2017, total health care spending will double to more than $4 trillion a year, accounting for one of every $5 the nation spends, the federal government projects.
The 6.7 percent annual increase in spending — nearly three times the rate of inflation_ will be largely driven by higher prices and an increased demand for care, the Centers for Medicare and Medicaid Services said Monday. Other factors in the mix include a growing and aging population. The first wave of baby boomers become eligible for Medicare beginning in 2011.
With the aging population, the federal government will be picking up the tab for a growing share of the nation's medical expenses. Overall, federal and state governments accounted for about 46 percent of health expenditures in 2006. That percentage will increase to 49 percent over the next decade.
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Racing between OPEC meetings in Vienna, Saudi Arabia's powerful oil minister Ali Al-Naimi told a reporter that the cartel was "determined" to keep the price of oil at around $25 a barrel, rather than risk a slump in the market by boosting its production.
Wait a minute. $25? Al-Naimi said that in April 2003 — less than five years ago — when a barrel of oil cost one-quarter of this week's whopping $100, and when prices were regarded as high enough to keep oil-rich countries happy. Which begs the question: How long will the price of oil remain sky-high?
Judging by the analysts' predictions, it could be several years. "Prices are going to be significantly higher," says John V. Mitchell, an OPEC expert and associate fellow at Chatham House in London. That realization deepened this week when OPEC president, Algeria's Oil Minister Chakib Khelil, rebuffed President Bush's appeal for OPEC to boost production, and so help avert a U.S. recession by easing oil prices on the world market. Instead Khelil said that production quotas for its 13 members — who supply about 40% of the world's oil — will "either decrease or be stable" when OPEC oil ministers next meet in Vienna on March 5. Adding to the jitters over the world's oil supplies was an explosion on Monday at a refinery in Big Spring, Texas, which halted its 67,000-barrel-a-day output, and could shut the facilty for two months. And even before then a bitter wrangle between Venezuela's oil officials and ExxonMobil over a rich oil field, as well as rebel action in the Niger Delta, had raised fears that oil supplies could be seriously interrupted.
But analysts say that the problems date back years, and could take several more years to fix. When oil prices were low during the 1980s and 1990s, big oil companies and governments decided it was not worth investing in new oil fields or in building thousands more oil refineries — projects which cost billions of dollars, and can take about seven years of work before any new oil is sold. That decision turned out to be a bad miscalculation, say analysts. It ignored the biggest factor which has sent the world's oil demand soaring — the economic boom in China, and to a lesser extent India. "No one saw this coming down the line 10 years ago," says Harry Tchilinguirian, senior oil market analyst for BNP Paribas in London. "You have to look at where demand growth is. Everyone looks West of the Suez Canal. But in fact all the action is happening East of that."
The price may also be affected by something a little more volatile: the action on Wall Street, where investors have poured money into the New York Mercantile Exchange, trading oil contracts — what analysts call "paper barrels" — in search of quick profits. "People are looking at oil as a hedge against inflation," says David Kirsch, an analyst for PFC Energy in Washington. He believes that with so many factors in play, "it's a fool's errand to calculate how much that's affecting the price of oil."
U.S. officials and the Paris-based International Energy Agency predict that oil demand will ease off this year with weaker economies in the United States and Europe. But while Americans and Europeans wince these days while filling their tanks, people in China and many other countries buy gas at heavily subsidized prices, says John Waterlow, an analyst at Wood Mackenzie, a business analysis firm headquartered in Edinburgh. "It is not being sold at market rates," he says. Meanwhile, with the high prices in the United States — still the world's biggest consumer of energy — oil companies are finally scrambling to lock in exploration contracts in key growth areas like the Caspian Sea, Canada and the West coast of Africa.
That new oil could take years to start flowing. And so oil prices are likely to remain high for years, and "could go higher, at least temporarily," says Waterlow. He says that if prices continue rising OPEC ministers will need to calculate whether to increase production and help avoid a deep U.S. recession — one lasting enough to ripple across the world, and hit its new oil-hungry customers in Asia. Until then, investors are likely to keep speculating on high-priced oil, and Al-Naimi, Khelil and others will hold the line, no matter the appeals from Washington.
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A key measure of consumer confidence dropped significantly in February, to the lowest level in more than 14 years, amid mounting concerns about jobs and slowing business activity.
Consumers claiming business conditions are "bad" rose to 21.8% from 20%, while those claiming business conditions are "good" decreased to 18.5% from 20.7%.
"With so few consumers expecting conditions to turnaround in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement.
The group's Expectations Index declined to 57.9 from 69.6, the lowest measure in more than 17 years.
Interest rates: The new conundrum
The news cams after a government report showed wholesale prices, measured by the Producer Price Index (PPI), increased more than expected on rising food, energy, and drug prices. Retailers including Home Depot (HD, Fortune 500) and Target (TGT, Fortune 500) also released weak earnings reports earlier in the day.
"Prices are extremely strong from rising PPI numbers, consumers are shopping for discounts, and gasoline prices are rising," said Anika Khan, economist with Wachovia. "There have been lots of signs of economic uncertainty that have led to lower consumer confidence."
The Present Situation Index registered 100.6, down from 114.3, according to the Conference Board.
"The weakening in consumers' assessment of current conditions, fueled by a combination of less favorable business conditions and a sharp rise in the number of consumers saying jobs are hard to get, suggests that the pace of growth in early 2008 has slowed even further," said Franco.
Consumers expecting business conditions to worsen over the next six months increased to 21.4% from 16.3%, while those anticipating business conditions to improve decreased to 9.5% from 11.6%.
The percent of consumers expecting fewer jobs in the months ahead rose to 27.9% from 21.5%, while those anticipating more jobs declined to 9% from 10.5%.
The percentage of consumers saying jobs are "hard to get" rose to 23.8% from 20.6%, while those claiming jobs are "plentiful" fell to 20.6% from 23.8% in December.
"With the credit crunch and the housing market in turmoil, consumers are very worried about a weaker job market right now," said Khan.
Consumer confidence, which constitutes nearly three-quarters of all U.S. economic activity, has been closely watched by investors hoping to determine what direction the economy is headed.
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The government is pulling out the stops to avert a recession this year. But there are signs that a protracted slowdown may be unavoidable - and that efforts to goose the economy may make matters worse.
It's clear that with food and energy prices rising sharply, many people are having trouble making ends meet - which is why government officials are acting decisively.
The rush to action suggests time is of the essence. But even with quick action to boost the amount of money floating around the economy, it's far from clear that the government's initiatives can overcome the growth-slowing effects of an overburdened consumer and a capital-impaired banking system.
Howard Simons, a strategist at Bianco Research in Chicago, warns that while the rate-cutting and stimulus plans are well intentioned, they are unlikely to result in a recovery any time soon. He says a look at currency markets suggests the U.S. economy is on the path to repeating Japan's so-called lost decade - the years of economic stagnation that followed the 1989 peak in stock and property prices. The problem, he says, is the weakening dollar.
And that's why the government's attempt to save the economy could actually be damaging it. Lower rates and more government spending tend to undermine the value of the dollar, which has already fallen sharply in recent years. By reducing interest rates even further, the Fed's rate-cutting policy invites hedge funds and other investors to participate in the so-called dollar carry trade - the practice of borrowing money at low U.S. rates for the sake of investing the proceeds in countries with higher interest rates, and pocketing the difference.
The dollar carry trade hurts the United States in two ways. First, it adds to pressure on the value of the dollar, because carry traders borrow in dollars and then sell the dollars to invest the proceeds in other, higher-yielding currencies. A weaker dollar reduces Americans' purchasing power. Second, dollars borrowed to invest in euros or Canadian loonies aren't available to be invested in U.S. enterprises. This deprives the economy of needed capital in the same way that overseas ownership of U.S. assets tends to enrich foreigners rather than U.S. citizens.
"The implications of this are very negative," says Simons. He says that by repeatedly cutting rates in the face of negative economic data, the Fed "is trying to do the right thing," but the "cumulative effect will end up being hideously negative." He warns that rate cuts and stimulus don't feed real economic growth. Meanwhile, inflation is on the rise - and keeping rates low is likely to leave the United States "in a seriously inflationary mode."
Of course, deciding just what course the Fed should be steering now isn't easy. Thanks to the massive global economic imbalances of recent years,developing nations such as China have been effectively subsidizing U.S. overconsumption, Brownstein notes. He says getting the U.S. economy back on its feet will take years of painful work -- starting with Americans admitting their mistakes and trying to live within their means. But no one should expect that process to be easy or pain-free, Brownstein adds.
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You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer. And with fears of a recession sparking both a worldwide market sell-off and emergency action from Federal Reserve chairman Ben Bernanke, Rogers again looks prescient - just as he has over the past few years as the China-driven commodities boom he predicted almost a decade ago began kicked into high gear. But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.
"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks the economy desperately needs.
"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."
Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."
Where he expects the pain to be most intense is on Wall Street. He says he hasn't covered his short positions on the investment banks or Citigroup (C, Fortune 500) and won't for a while. "Those things are going to go way, way, way down," says Rogers. "The investment banks are down now because of the problems in the credit market. Wait until the effects of the bear market come along. If you just go back and look at other bear markets, investment bank stocks have gone down enormously. We haven't gotten to that stage yet. It's going to bring their balance sheets under duress. This is going to get much worse. But that's where there have been excesses for the past decade or so. And whenever you have a bear market come along the great excesses of the previous period are the ones that get cleaned out the most."
He'll be watching - from Singapore.
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Indeed, currency analysts at Merrill Lynch wrote this week that they expect the dollar to fall further if the Fed continues to cut rates. The analysts write that they see dollar negatives in the "the erosion of the [dollar] as a safe haven, the lack of private sector buying, central bank flows and a widening interest rate differential." The worries about the strength of the dollar point to the Achilles heel of the U.S. economy: the fact that U.S. consumers have been financing their consumption by borrowing cheaply overseas.
At some point, observers warn, foreigners will stop wanting to send their money, which will drive up interest rates and hurt economic growth. "The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves," financier George Soros wrote this week in the Financial Times. "If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end." That's a worrisome thought indeed.
Meanwhile, Hamilton says that even with real estate prices poised to keep falling for some time, inflation worries can't be deferred forever. He says the Fed "may have to wrestle with that beast" down the road and warns that even if it's possible for the Fed to cut interest rates further, Bernanke and his colleagues should be careful about heading down the road toward 1 percent rates. "Anything below 2.5 percent would have me worried," he says. Cutting rates more sharply runs the risks of "sowing the seeds for the next problem" in the economy, Hamilton adds - very much as the Fed's low-rate policy during the recovery of 2003 and 2004 fed the housing bubble that is now deflating.
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The decline in residential real estate accelerated though the end of 2007, and home prices in 20 key markets plunged 9.1% for the year, according to a survey released Tuesday.
The S&P Case/Shiller Home Price index showed its largest annual drop in its 20-year history. By comparison, during the 1990-91 recession, home prices fell 2.8%.
Prices dropped faster throughout 2007 with the index recording a 9.1% year-over-year drop in December.
"We reached a somber year-end for the housing market in 2007," said Robert Shiller, Chief Economist at MacroMarkets LLC and co-founder of the index, in a statement. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago."
All metro areas are now reporting at least four consecutive monthly declines.
Case/Shiller's 10-city index fell even more sharply and finished down 9.8%.
The Case/Shiller indexes compare same-home sale prices. The industry considers them to be among the most accurate snapshots of housing prices.
Of the 20 metro areas examined, all but three posted declines for the year. Miami homes lost 17.5% in value - more than any other metro area - and Las Vegas and Phoenix both had 15.3% declines.
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