Angst has been the pervasive economic theme of late. February’s reports on the real economy have done little to alleviate the gloom in the United States. Job numbers were quite weak on the face of it, although the unemployment rate dropped by one-tenth of a per cent from last month’s shocker. Builders continued to report dismal results and sales of existing homes continued to slide.
An index that measures activity in the services sector plummeted this month. That should come as no surprise, given the bloodbath among bankers of every stripe and in all the activity relating to real estate. Yet it is sobering to have confirmation of a slump across the entire services sector, since this is what has provided growth since manufacturing’s decline.
The slow retail sector is part of the trouble in services. The headlines call January the slowest in the shopping malls for 40 years. Walmart, the biggest, reported people were using their holiday gift certificates to buy necessities like food staples, rather than the more usual discretionary goods. Consumer confidence is down.
These news stories tend to build and it is possible the American borrow-and-spend zeitgeist will undergo a lasting transformation. A combination of unavailable credit and reduced appetite to consume beyond one’s means might take a deep bite out of consumption.
However, it will take more than a month or two of weak retail results to prove anything that dramatic is afoot.
Toyota gets the message Americans cannot go on being the big spenders for ever. Their auto sales growth is already coming from Asia and the “resource-rich countries,” as Toyota refers to the current winners in the global market place. And the shift is not marginal.
The US share of Toyota’s sales in the last three quarters of 2007 was 44 per cent, whereas in 2006 it was 57 per cent. Asia’s share of the company’s sales jumped from 15 per cent to 25 per cent. Those are the kind of changes in consumption patterns that are going to have to occur to get trade and consumer debt back into sustainable balance.
While stock markets have bounced around and are still not registering fully how badly the economy may deal with corporate profits, credit markets seem to be where the action is. A debt-market expert was reported as being perplexed that the equities markets seem so relatively confident in the face of full-scale retreat on bonds.
Junk bond yields are way up relative to much-safer-than-houses Treasuries. Debt investors are fearful that the economic slowdown will result in over-leveraged companies defaulting on interest payments. In fact, there were more defaults in the first few weeks of 2008 than for all of 2007 put together.
The assumption that rescues would be arranged for the larger bond insurance firms, MBIA and Ambac, begins to look less sure. The ratings agencies keep reminding everyone that if these firms don’t get sufficient capital to back their guarantees, then the ratings on all the strange paper they blithely insured will have to come down. First we were told to expect a co-ordinated bailout. Then word was banks would come together in separate deals to rescue the insurers they had most used to back the paper that sits on their balance sheets.
We’re still waiting. MBIA instead went out on its own to raise a billion dollars in capital, which knocked its share price down, inevitably. A billion does not sound like a big enough cushion to stave off the kind of trouble they are in with their guarantees of collateralised debt obligations. But if MBIA can raise any money at all in this equity market and obtain backing from JPMorgan and Lehman as underwriters, that is better than nothing.
Symptoms of the credit market mess included the big dent in reported profits at Bristol Myers, the pharmaceutical company. All Bristol Myers had done was park its cash in something very much like a money market account, only to discover that the ‘auction notes’ it saw as very short-term and liquid could actually turn out to be much less liquid when markets turned fearful.
That minor misunderstanding cost it $275 million in charges. Since there was nothing exotic or speculative about its cash management approach, it was particularly disturbing to hear of this loss. How many other solid companies outside of the go-go banking sector amy have fallen into a trap like that?
Various private-equity buyouts continue to come undone because nobody wants to hold the debt. While that reluctance is natural as we move into a likely recession, it removes one of the stock market’s comforting underpinnings.
Fed governors have been back to their usual speeches, giving hints that output – no, inflation – no, output – are more on their minds. If recent past is prologue, the stock or credit markets will throw a conniption fit and frighten the Fed into another cut, and inflation be darned.
So far foreign holders have put up with the inflation risk that this loose US policy represents without dumping long-term treasury securities and the dollar. The Bank of England loosened rates by much less than its American cousin, so now the bank rate is 5.25 per cent in Britain and 3.0 per cent in the USA.
The European Central Bank is holding firm on rates, but making more accommodating noises about the risk to output than it has before. The British and Europeans are painfully conscious of inflation being at or above their comfort level. They have to be gambling the economic slowdown will dampen prices and any monetary loosening they undertake now will not really kick in until after the downturn has done its work on inflation.
The Senate and House agreed on a fiscal stimulus bill in double quick time and it will become law next week. Congress and the President were more reasonable than usual in their negotiations, all afraid to be blamed for obstructing a measure that nobody really expects will do a whole lot to change the course of the economy.
Cheques cannot go out until May at the soonest because the Internal Revenue Service first has to handle taxpayers’ annual returns. These flood in up until April 15, and a bit beyond.
Heavyweight economists have been rumbling about whether the Fed and Treasury have the right model of the way policy works. A big part of the argument is whether governments can smooth out the business cycle or whether they should use monetary policy to target a steady inflation number.
These are not really antitheses. The British monetary authorities assume that when growth slows price pressures will abate and vice versa, so when they see growth slowing they feel free to take their foot off the money brakes and help the economy to keep growing.
The Fed can point to the last few financial crises they turned around with cheap money, but they know the housing glut, the related consumer credit crunch and the flight to quality in the credit markets are a triple whammy the likes of which they have not faced in decades.
Others wonder if the fiscal-stimulus rebate cheques (of a few hundred dollars to each household) will increase spending or merely go to pay off credit card debt. And others wonder if the rebate money people do spend will help the economy much if it goes on imports. The idea of expanding the deficit just to send folk out on a shopping spree is anathema to many.
It seems as if the politicians, who are trying to help, cannot win for losing. Which, after all, comes close to the definition of angst.
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