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JULY 2008 BEACON Worrisome Wednesday Brings Terrible Troika of Economic News
Car sales are in the ditch, Wall Street hears the roar of the bear, and American workers’ pressures worsen
Wednesday brought a rash of economic and business news and data that suggest that the U.S. economy’s woes are far from over and may not rebound until 2009 or even beyond. Leading stories from Reuters and The New York Times tell a tale of deepening woe with several eroding statistics that suggest the American consumer is cutting spending. And the American consumer is 70% of the overall economy.
Workers face double whammy
According to a story in the New York Times, the American worker is facing pressures that continue to increase. Citing plummeting home prices which caused layoffs of hundreds of thousands of housing related workers…coupled with tight credit making it very difficult for consumers to obtain credit to purchase homes and help reverse the trend…the overall picture is not a pretty one.
 Exacerbating the problem, Detroit released new sales data indicating that sales are at their lowest level in fifteen years and suggesting that auto manufacturers will be forced to make further production cuts which will mean more cuts in their employment.
In fact, unemployment has risen to 5.5% in May, a full percentage point over last year. When those who have given up trying to obtain employment and those who are underemployed are added in, the rate is 9.7% in Labor Department statistics.
Detroit in the ditch
Detroit appears to have run off the road as the latest sales data shows remarkable declines that suggest that car buyers are holding off. For the month of June, Chrysler’s sales were down 36%, Ford’s were off 28%, and GM’s sales declined 18%. Even Toyota was hit with sales off 21%.
While faring better than its American competitors, GM is widely believed to have been helped by a recent blitz of 0% financing that some analysts feel will  hurt future month’s sales results.
In fact, on Wednesday, Reuters noted that GM’s stock tanked a full 11% and hit a 54-year low after a Merrill Lynch analyst said GM needed to raise $15 billion to ride out the economic storm and that bankruptcy is “not impossible.” GM did not comment on the Merrill report, but insists it has adequate liquidity for the current situation.
Like the American worker, auto makers are also caught in a type of double whammy as consumers are buying fewer vehicles overall…but when they do want to buy - with oil at an all time high of $144 per barrel, they only want to purchase small and fuel-efficient vehicles. Manufacturers are stuck with factories spitting out pickup trucks and SUVs. They are rapidly attempting to convert their factories to producing want the consumer wants…but it will be months before they are able to make this switch.
And even when the switch is made, most analysts predict the auto market will decline on an ongoing basis for the near- and mid-term future to less than fifteen million units a year. Recently, it had consistently averaged more than sixteen million units a year.
Reuters quoted Citigroup analyst Itay Michaeli as forecasting that a recovery of the U.S. auto market wouldn’t begin until 2010 or 2011.
The bear is roaring on Wall Street
In a story on Wednesday, Reuters reported that Wall Street has slipped into a bear market by closing a full 20% below its peak last October. Although the market has been perilously close to this level in the past, it finally could not rise above the several negative economic signs that just seem to keep on coming.
Reuters also quoted Treasury Secretary Henry Paulson who said that “high oil prices, further home price declines and capital markets turmoil will prolong the American economy’s slowdown.”
The gloomy news was too much for the Dow to withstand and it fell 166.75 points or a full 1.46% to close at 11,215.51.
This recession is a different kind of animal
This continuing economic sluggishness, which seems determined to continue on at current levels or worse, appears to be resistant to efforts to try and re-ignite growth. Although the Fed cut interest rates…and assisted in helping banks avert a credit collapse…and the government passed an economic stimulus package with tax rebates to consumers…still the economy struggles.
The durability of this downturn has caused some analysts to suggest that this is a different type of recession. The Times article quotes Lehman Brother chief United States economist as saying, “In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we’re not getting the classic two or three negative quarters. Instead, we’re expecting two years of sub-par growth. Growth that’s not enough to generate jobs. It’s kind of a chronic rather than an acute pain.”
But perhaps more importantly for us in the electronics industry is the comment in the same article from Ian Shepherdson, chief United States economist for High Frequency Economics, “Slowing wage growth and falling employment is absolutely toxic if your business is selling anything to consumers.” Photo credits: Top two photos, Reuters. Graph, New York Times |
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