Saturday, November 01, 2008

Some weekly economic headliners

This week, I've been housesitting at my parent's place down in Hollister. In terms of high speed Internet, Hollister is still in the dark ages, with some really poor utility services. The problem for Hollister is that they've expanded too quickly in the construction of homes during the housing bubble, however the city refused to expand their utility services to keep up with the demand for housing--Hollister is about 35 miles south of San Jose, right in the middle of farmland. About six years ago, Hollister placed a moratorium on new home construction because the city couldn't keep up with the water and sewer demand. Now Hollister is charging higher utility prices just so they can improve their water and sewer plants.

So what does this have to do with high speed Internet? Well, there is no competition for high speed Internet in Hollister. In San Jose, I have a choice between AT&T high speed Internet, or even Comcast Cable internet. My parents are currently on a dialup service through a company called Hollinet, which charges $19.95 per month for 56k modem connections. Charter Cable, Hollister's cable service, offers cable internet service from $54.99 for 5 megabytes per second cable internet, to $79.99 for 50 megabytes per second cable internet service. I did find a DSL service through, however they are closed on Saturdays, so I can't determine their prices for their DSL services. Why am I bringing this up? Because outside of the San Jose Bay Area, there is not much competition between the Internet service providers to bring high speed Internet into a smaller city like Hollister, at a decent price. It is disappointing because I know my parents would use, and enjoy, the high-speed Internet connection at an affordable price. But, I guess it is too expensive for these big Internet providers to bring their services into a small town like Hollister.

And as the web becomes more embedded with images, video, and flash animation, surfing the web via a dialup service provider becomes even slower, and more frustrating.

The sad thing here is that the Internet has a great potential for providing resources, information, and commerce to just about every American citizen here. This is a tool that can be used to gather information, conduct research, communicate via email or instant messenger, and even purchase products from businesses around the world. E-commerce can certainly play a major role in generating consumer spending in this slowing U.S. economy. However, you really can't utilize the power of the Internet, and the benefits it can provide to consumers, via a slow dial-up connection. The bigger Internet service providers will certainly refuse to provide affordable Internet services at an affordable price to those areas that they feel are not cost-efficient for them, which are basically the rural areas (And Hollister is surrounded by nothing but farmland). So my parents are stuck within this dead rut.

Anyways, I've been watching the economic news over the past week, and none of it is really good. The big news story for the week has been the decline in U.S. GDP growth for the third quarter. So let us get into a weekly economic headliners.

U.S. economy shrank in the third quarter: We are now in a recession. I know I've been saying this for the past year--I think even two years. But I've certainly noticed how resilient the U.S. economy has been, over the past couple of years, in maintaining even the slowest growth rate in the face of all the bad economic news--consumer spending slows, debt increases, more jobs lost, increasing inflation, increasing energy and food prices, the sub prime mortgage mess, increased foreclosures on homes, falling home prices, and yet the U.S. economy still has grown by 0.00001 percent. Maybe it was the gimmick of the economic stimulus checks that has kept the U.S. economy out of a recession under the Bush administration's term. Either way you call it, this is still a Bush administration recession. From MSNBC News;

WASHINGTON - The government reported Thursday the economy shrank in the summer, the strongest signal yet that a recession may have already begun, a day after the Federal Reserve slashed a key interest rate to battle an economic downturn.

The Commerce Department reported that the gross domestic product, the broadest measure of economic health, fell at an annual rate of 0.3 percent in the July-September period, a significant slowdown after growth of 2.8 percent in the prior quarter.

The spring activity had been boosted by the $168 billion economic stimulus program, but the economy ran into a wall in the summer as the mass mailings of stimulus checks ended and consumer confidence was shaken by the upheavals on global markets. Consumer spending, which accounts for two-thirds of the economy, dropped by the largest amount in 28 years in the third quarter.

The U.S. economy has officially shrunk by 0.3 percent of its gross domestic product. The $168 billion economic stimulus package has petered out at the end of summer as consumers have spent their checks. With the financial markets going into a meltdown, and the U.S. government now spending another $750 billion "economic stimulus program" for bailing out Wall Street, American consumers have slammed the breaks on their spending. As a result, the U.S. economy has contracted.

This contraction will continue into the fourth quarter of 2008, and perhaps even into the first couple of quarters of 2009. There is still a lot of fear within Wall Street, as we have seen with the stock market's wild ride during October. I believe the stock market will continue to wildly gyrate through the end of this year. And because of these wild mood swings in the stock market, we're going to see another contraction during the fourth quarter, as American consumers cut back on their holiday shopping. I think retail sales for the fourth quarter will be the worst seen in years, with retailers slashing their prices even further just to get the inventory off the shelves. And if the U.S. economy contracts in the fourth quarter of 2008, then it will be a classical definition of a recession being two consecutive quarters of negative GDP growth. Although this recession will feel like it has been with us a lot longer because of the sluggishly slow, almost stalling U.S. economic growth over the past year or so.

Consumer sentiment takes a swan dive: I didn't realize consumer sentiment had taken this deep of a dive. From MSNBC News;

NEW YORK - Consumer confidence suffered its steepest monthly drop on record in October, a survey showed on Friday, as the worst financial crisis in generations continued to take its toll.

The Reuters/University of Michigan Surveys of Consumers said its final reading of its index of confidence plunged to 57.6 in October from 70.3 in September.

That was just slightly below economists' expectations for a reading of 57.8, according to the median of their forecasts in a Reuters poll. It was up marginally from 57.5 recorded in the Surveys' of Consumers preliminary report released on October 17.

"Consumers reported the most dismal assessments of their current financial situation ever recorded," the report said.

The index was its lowest since a reading of 56.4 in June of this year.

The report said there have previously only been four surveys that posted double-digit declines, "and all resulted from severe economic dislocations, with the losses accelerated by fear and panic."

The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

I find it especially interesting that the report stated that double-digit declines "all resulted from severe economic dislocations, with the losses accelerated by fear and panic." We had such fear and panic take place between the end of September and the beginning of October, as Wall Street banks started failing, the global stock markets plunging, and the U.S. government quickly pushing through a $750 billion bailout package for Wall Street. It has been nothing but fear and panic with this U.S. economy slowing during a presidential election. Is it no wonder that the U.S. economy contracted 0.3 percent for the third quarter? And as Americans start to open their 401K statements, are they going to be in a holiday mood to go Christmas shopping this December?

Personal spending posts biggest decline since 2004: This is also through MSNBC News;

WASHINGTON - Consumer spending in the United States dropped in September by the largest amount in four years, while incomes suffered because of Hurricane Ike.

The Commerce Department reported Friday that personal spending fell by 0.3 percent last month, the biggest decline since June of 2004. That followed flat readings in both July and August, contributing to the worst quarterly performance in 28 years.

Incomes showed a 0.2 percent rise in September, just half of the August increase, a slowdown that partly reflected the adverse effects of Hurricane Ike along the Gulf Coast. The storm cut into rental payments and earnings from businesses affected by the rough weather and its aftermath.

The September spending decline was slightly worse than economists expected and confirmed that the economy hit a wall in the third quarter because of the weakness in consumer spending, which accounts for two-thirds of total economic activity.

Here the decline in personal spending was not the result of the Wall Street meltdown, or the global decline in the world stock markets, but rather because of "the adverse effects of Hurricane Ike along the Gulf Coast," as the rental payments and earnings from businesses were affected by Ike. This was another external factor that has slammed the U.S. economy, perhaps affecting the contraction. It will be interesting to see the results for personal spending in the fourth quarter, as consumers factor in the financial market meltdown, the contracting U.S. economy, and the gyrating U.S. stock market.

Fed cuts interest rate by half point: This is from The New York Times;

WASHINGTON — The Federal Reserve lowered its benchmark interest rate by half a percentage point on Wednesday, its second big rate cut this month, as policy makers tried to fend off what could be the worst economic downturn in decades.

The move brought the target rate for federal funds — the interest rate at which banks lend to each other overnight — to 1 percent, down to the near-record lows reached in 2003 and 2004, when the Fed was trying to encourage an economic recovery after the bursting of the Internet bubble. The central bank left open the possibility of going still lower, warning “downside risks to growth remain.”

Graph showing Federal Reserves benchmark rate for past eight years. From the New York Times;

As the crisis that began in the mortgage market spreads through the economy, policy makers are redoubling their efforts to contain the damage. Even as the Fed reduced rates on Wednesday, the Bush administration was weighing a plan to slow the foreclosure epidemic in the nation’s housing market. Details of the initiative were in flux, but the plan could involve the government guaranteeing the mortgages of as many as three million at-risk homeowners, a step that could cost taxpayers tens of billions of dollars, people briefed on the plan said.

But neither the Fed’s move nor word of the possible mortgage rescue were enough to allay concern in the financial markets that the economy was in deep trouble. The stock market, which had rallied briefly after the rate cut was announced shortly after 2 p.m., tumbled in the final minutes of trading.

In a statement, the Fed acknowledged that the economy had lost steam on almost every front — consumer spending, business investment, financial markets and even exports, which had been the one bright spot recently. For the time being, infla-tion is of little concern.

I find it rather ironic how the Fed is now suddenly concerned about the slowing U.S. economy, and is now ignoring its age-old enemy of inflation. However, I think that the Federal Reserve has got it backwards. The Fed may be hoping that a half-point rate cut will entice the banks to loosen credit standards, and start making personal and business loans as a means to stimulate the economy. The problem is that the banks are refusing to make loans, unless you have a triple-platinum-coated credit rating, with gobs of assets to show how little you really need the money. According to this WJZ-TV 13 story: the White House is demanding that banks stop hoarding the bailout money;

WASHINGTON (CBS News) ― An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans. Wall Street soared nearly 900 points on bargain-hunting and hopes of a hefty interest rate cut by the Federal Reserve.


Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.

"They (regulators) will be watching very closely, and they're working with the banks," Perino said.

There is plenty of liquidity, and stimulus, in this U.S. economy, with the $750 billion Wall Street bailout package and the Fed Reserves half-point rate cut. The U.S. Treasury is even buying shares in banks, as a means of pumping even more liquidity into the market. Banks are not handing out loans. The banks have been saddled with so much losses due to the sub prime mortgage meltdown, that they are refusing to write even more loans on the fear that such loans will go bad on their balance sheets. So the credit market is being restricted. Business cannot get short-terms loans in the credit markets to cover payrolls, and other expenses, causing their own financial problems. Businesses then have to cut back, perhaps even with job layoffs. Unemployed Americans can't pay for their mortgage payments, thus causing foreclosures on their homes. Banks get saddled with even more bad debt, further restricting their loans. Fear starts to prevail in the marketplace, as economic problems steamroll onto even more economic problems. This is not a problem of liquidity or stimulus, but of fear and a lack of confidence. Going back to the New York Times article of the Fed's interest rate cut;

The government has taken a series of extraordinary steps in recent weeks to get credit flowing again, but while the strains in the credit markets have eased somewhat in response, confidence remains fragile. The central bank left room for itself to drive short-term rates even lower, saying that it would “act as needed” to promote both sustainable growth and stable prices.

But analysts said lower interest rates were not likely to accomplish much at this point, because the economy’s biggest problem is the fear among banks and financial institutions about lending money.

“The difference between 1.5 percent and 1 percent is really pretty insignificant, particularly when the banking system is as weak as it is,” said Ethan Harris, a senior economist at Barclay’s Capital. “You have a big uncertainty shock. It’s not just that the markets have declined. People are uncertain about where the world is going.”

There is still too much fear in the marketplace. Banks are afraid of loaning out money due to the loans going bad. Businesses are afraid of the marketplace uncertainty, and may end up cutting back on employment. American consumers are afraid of losing their jobs, their homes, and their retirement savings, thus are cutting back on their spending, or pulling out of the stock market. The problem for the Federal Reserve, and for the next incoming president, will be to find some way to reduce the fear in the economic marketplace, and to instill some type of confidence into allowing the U.S. economy to go forward. That is a tall, tall, order.

Banks using bailout money to buy up other banks: This story sort of dovetails into the WJZ-TV 13 story of banks hoarding bailout money, but it does show just how banks are using the bailout money to do everything, except making loans to customers. From the Washington Post;

Several major U.S. banks are leaning toward spending a portion of their federal rescue money on acquiring other financial firms rather than for issuing new loans, the primary purpose of the government's $250 billion initiative to invest in banks.

J.P. Morgan Chase, BB&T, and Zions Bancorporation have all said in recent days that they are considering using some of their federal money to buy other banks.

About 10 financial institutions belonging to the Financial Services Roundtable, which represents 100 of the nation's largest financial services firms, are also considering making acquisitions with the money, said Scott Talbott, the group's senior vice president.

Treasury Secretary Henry M. Paulson Jr. confirmed yesterday that some banks may use the capital they receive through the Treasury program to buy weaker banks and that this could benefit the financial system.

In an appearance on "Charlie Rose," Paulson said acquisitions were "not the driver behind this program. The driver is to have our . . . healthy banks be well-capitalized so they can play the role they need to play for our country right now." He added, "There will be some situations where it's best for the economy and for the banking system for there to be a consolidation."


The interest among banks in tapping the funds to finance acquisitions raises the possibility that the financial services industry could undergo a wave of mergers even more intense than what many analysts had predicted.

According to some analysts, an excess of mergers and acquisitions in the financial sector over the past decade created too many institutions deemed "too big too fail," meaning that the government would be obliged to rescue them if they faltered. Now, some worry the government's program will continue to drive that trend.

"I think it's a very serious problem, and I think it's part of a general failure to enforce antitrust laws in the last few years," Nobel Prize-winning economist Joseph Stiglitz said at a hearing of the House Financial Services Committee yesterday. "So one of the things I think is part of your exit strategy is that we have to think about breaking up some of the big banks," added Stiglitz, a Columbia University professor.

So, I guess the federal government is now encouraging banks to purchase even more banks with this bailout money, creating even bigger banks and less competition within the marketplace. And if the banks get too big, from purchasing smaller banks with taxpayer money, does that mean that the federal government will be using even more taxpayer money to break these big banks up? Talk about an economic madness here!

A Rate of Zero Percent From the Fed? Could be coming: In the wake of the Federal Reserves' half-point interest rate cut, the New York Times is now speculating on the prospect that the Federal Reserve may just lower interest rates to zero percent;

WASHINGTON — Zero percent interest rates! It sounds like free money, or maybe a promotional deal from General Motors to get people to buy Hummers. Are zero rates coming to the Federal Reserve?

As it happens, the Fed is surprisingly close to that point already. On Wednesday, the central bank lowered its target for the federal funds rate — the rate that banks charge each other on overnight loans — to 1 percent from 1.5 percent.

But in practice, the actual federal funds rate fluctuates slightly around its target as the Fed carries out its open-market operations in the money markets. And because banks and financial institutions have been so frightened about lending in the last month, the actual Fed funds rate has been below 1 percent for the last two weeks. On Tuesday, it averaged only 0.67 percent.

A growing number of analysts now predict that the economy is so weak that the Fed will have to reduce its official target to zero if it wants to jumpstart the stalled economy.

Japan’s central bank reduced its benchmark interest rate to zero for five years, from 2001 to 2006. It did so mainly to combat a particularly persistent case of deflation, a broad-based decline in consumer prices, and to revive economic growth.

Some analysts see signs that the United States faces a similar threat. Like Japan’s, American banks have become so decimated by losses in real estate that they are either unable or unwilling to resume normal lending. And as prices for oil and many other commodities have crashed during the past two weeks, some analysts now warn that deflation might be a threat here as well.

With the Fed funds rate already down to 1 percent, and below one percent on many days, the central bank is fast approaching what economists call the “zero bound.”

If the Fed funds rate did drop to zero, it would not mean free money for consumers or businesses. The zero rate would only apply to the reserves that banks are required to maintain and that they lend to one another. Customers would still have to pay some interest, but the rates could be extremely low for some business borrowers.

According to Wikipedia, Japan's economy collapsed due to rampant speculation in an over-priced real estate market during their own bubble in the 1980s. Banks were granting risky loans on the extreme value of these real estate holdings. The Japanese economy collapsed, and banks were stuck with this bad debt that they refused declare as losses. The Tokyo stock market and real estate market collapsed, forcing investors to pull their money out of Japan, creating a deflationary spiral. Interest rates dropped so low that Japanese savers refused to place money into savings accounts. Japanese consumption was also extremely low. The Japanese government continued to subsidize failing banks and businesses, creating "zombie businesses." The Japanese economy continued to stagnate throughout the 1990s. In 2001, the Japanese government reduced interest rates to zero as an attempt to stop the deflation in the Japanese economy. The zero-percent interest rate lasted in Japan until 2006, when it was eliminated. The Japanese economy is still limping along, even today. You really have to wonder just how similar the U.S. economy is now, with the Japanese economy in the late 80s, early 90s. Both economies suffered a collapse in the real estate market after rampant speculation. Both nations’ banking system was saddled with bad loans that they refused to write off. And the savings rates have dropped with both countries--Japanese savings rates dropped as deflation hit the country and banks dropped the interest rates to savings accounts to practically zero, while U.S. savings rates have always been fairly low. So there may be some lessons to look at with Japan's economic stagnation for U.S. policymakers to consider, as they attempt to pull the U.S. out of its own economic problems.

Exxon Mobile breaks another profit record: There is not much more I can say about this MSNBC story;

HOUSTON - Exxon Mobil Corp., the world’s largest publicly traded oil company, reported income Thursday that shattered its own record for the biggest profit from operations by a U.S. corporation, earning $14.83 billion in the third quarter.

Yet numbers contained within the company’s most recent financial report revealed production numbers that continue to sag, and shares slipped 3 percent in midday trading.

The Irving, Texas-based company has reported unprecedented back-to-back quarters, the end of the most recent coinciding with a rapid plunge in crude prices. Benchmark oil prices fell another $2.91 to $64.59 Thursday on the New York Mercantile Exchange, about 56 percent off record highs in July.

Exxon said net income jumped nearly 58 percent to $2.86 a share in the July-September period. That compares with $9.41 billion, or $1.70 a share, a year ago.

The previous record for U.S. corporate profit was set in the last quarter, when Exxon Mobil earned $11.68 billion.

Revenue rose 35 percent to $137.7 billion.

Chevron also reported "the largest quarterly profit in its 129-year corporate history," earning "$7.89 billion in the third quarter, more than double the $3.72 billion profit of a year earlier. Revenue shot up 43 percent to $78.87 billion from $55.2 billion." I should point out that Exxon and Chevron are making these huge profits, even as gas prices have tumbled 53 cents per gallon in the past two weeks, with gas selling for less than $2.00 per gallon in some parts of the U.S.

There are still so many more economic stories to look at. As the economic situation gets even worst for the U.S., American voters will have to seriously consider which presidential candidate will be able to guide this country out of the morass. The next decade will probably be a very trying period for this country, perhaps as trying as the 1930s were.

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