Tuesday, February 03, 2009

Some Tuesday economic headlines

How about some economic headlines to start today:

Macy's to cut 7,000 jobs; I saw this headline yesterday, but was a little busy to be posting. This MSNBC News story reports that Macy's will be eliminating 7,000 jobs, or around 4 percent of its workforce, as the company attempts to consolidate itself into a single unit during this economic downturn. According to the MSNBC News story;

Macy’s announced last month — on the heels of the worst holiday shopping season in decades — that it would close 11 stores, affecting 960 employees. The company expects the additional actions announced Monday to lower its annual selling, general and administrative expenses about $400 million per year starting in 2010.

The company also slashed its quarterly dividend to 5 cents from 13.25 cents. The dividend will be paid on April 1 to shareholders of record March 13.


The news from Macy’s came as the government released yet another batch of bad news on consumers’ financial health: Consumer spending fell for a record sixth straight month in December as financially strapped households, worried about rising layoffs, increased their savings rates to the highest level since May, federal officials said Monday.

Department stores have been especially hard-hit by the poor economy as shoppers cut spending and turn to discount stores.

Nobody has any money to buy things. So Americans are cutting spending, and they are avoiding the high-end department stores (Can you say Macy's?), while going to the lower-end discount stores to fulfill their shopping needs. It is no wonder that Macy's is in trouble here. The MSNBC story also reports troubles with two other high-end department stores. Gottschalks has filed for Chapter 11 bankruptcy and has placed itself up for sale, while Nieman Marcus Group said that they are cutting around 375 jobs, or around 3 percent of its workforce.

Americans are spending less and saving more; According to this MSNBC News story, consumer spending plunged for the sixth straight month in December, as the Commerce Department reported that personal consumption spending dropped by 1 percent for that month. This was worst than the 0.9 percent decline that economists were forecasting. With Americans worried about the increasing possibility of job layoffs, they boosted their savings rate to 3.6 percent of their after-tax incomes in December, the highest level since last May, when tax rebate checks sent the rate up to 4.8 percent. Americans are worried about the job layoffs, so they are increasing their savings rate as a "rainy day fund" in case they end up getting laid off. Of course, this isn't good news for the retailers, who are seeing Americans cutting back on their spending, and such cutbacks are seriously hitting the retailers' bottom line--especially with the awful holiday season that the retailers suffered through. I wonder if this savings boost by American consumers is a short-term boost, or a part of a longer-term trend, considering the problems Americans are facing with the housing bust, the serious drop in housing values, and the increased foreclosures due to higher interest payments on subprime and ARM loans.

More Big Three auto woes; This MSNBC News story reports that General Motors U.S. vehicle sales plunged 49 percent in January, while Ford's sales dropped 40 percent. Chrysler is predicting that their U.S. auto sales could drop around 35 percent in January. On the import side, Toyota sales dropped 32 percent for the month, while Honda's sales dropped 28 percent. All of the automakers are facing some serious sales declines in this U.S. recession, with the Detroit Big Three in worst shape than the Japanese rivals. The problem for the auto industry is not just the serious U.S. recession, or even the fact that Americans do not have any money to spend on cars, but also the tightening credit market. Cars are usually purchased through auto loans from banks. However, with the banks suffering from their own losses due to the speculation on subprime loans during the housing bubble, they have frozen out the loaning of money to anyone wanting to purchase a house, invest in a business, or purchase a car. So the credit market needs to be thawed out, allowing American consumers to purchase new cars via auto loans. Of course, this is overly simplified, but I guess it shows another problem this U.S. economy is facing.

BP reports first quarterly loss in 7 years; I'm trying to figure this one out--especially when Exxon reported a huge $45.2 billion profit for 2008. This is from The New York Times:

LONDON — The British energy giant BP became the latest oil company to report a fourth-quarter loss and warned on Tuesday that demand would probably continue to drop as the global recession deepened.

BP, Europe’s second-biggest oil company behind Royal Dutch Shell, had a loss of $3.3 billion, or 18 cents a share — its first quarterly deficit in seven years. BP had a profit of $4.4 billion, or 23 cents a share, in the period a year earlier. The chief executive, Anthony B. Hayward, warned that “the next year or two will be challenging” and that record earnings might not return for some time.

Oil giants like Shell, ConocoPhillips and Total reported declining revenue or losses in the fourth quarter as the price of oil dropped to the lowest level in four years. BP said an oil price of about $60 a barrel was “appropriate” because it would allow the company to invest in projects to guarantee supplies once demand recovers. Oil was trading Tuesday in the $40-a-barrel range.

As oil prices are falling, the revenues for these oil companies are also falling--especially if the costs for refining and processing the oil remains the same. I am also thinking that as the world economy slows down, then demand for oil is also slowing. That is what may be causing the quarterly losses for BP, Shell, and other oil companies. As for Exxon, they had so much cash to diversify into other investments, besides oil, that they could probably afford to suffer a decline in oil production and still profit from it.

Pending home sales rise 6.3 percent in December; Here is some good economic news from The New York Times;

The National Association of Realtors said that pending home sales rose 6.3 percent in December from a month earlier, with strong gains in the South and Midwest. The number of pending home sales — those in which a buyer has signed a contract but not closed — were up 2.1 percent from December 2007.

“We’ve got some up-turns that are encouraging to us,” said Jed Smith, director for quantitative research of the Realtors’ group. “It’s the direction we like to see.”

But economists cautioned that December could prove to be nothing more than a bump in real-estate’s long slide.

“They rebounded from an all-time low, so the level is still low,” said Patrick Newport, United States economist at IHS Global Insight. “Sales are going to continue sliding because the recession is intensifying. Banks have tightened credit since last year, and they’re not easing up.”

The number of pending sales for 2008 was down 9.5 percent from 2007 — a sign of the toll that the tight credit markets had inflicted on the flagging housing market. The Commerce Department reported that new-home sales in December fell to an annual rate of 331,000, their lowest point on record.

Those Americans, who have the money to buy homes, are finding some incredible deals as home values have dropped. This isn't to say that the housing crisis is still over. Home foreclosures are still going to continue as we shake off the excesses of the subprime mortgage crap. According to this January 23, 2009 AOL News story;

The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3 month supply in October.

But now it seems quite possible that these figures, which are already at record highs, are underestimating the situation. And if that's the case, it could take much longer for the housing market recover than analysts currently expect.

The chief problem is probably system overload: Lenders are just not prepared to handle the sheer numbers of foreclosures that they have on their books. Banks took back about 860,000 in 2008 - more than twice the number in 2007 - according to RealtyTrac. Before the housing crisis hit, it took only about a month to get a bank-owned foreclosure on the market.

There is almost a year's supply of housing on the market, with the banks bringing in even more foreclosures, as Americans are facing even higher housing payments due to subprime and ARM interest rate increases. Banks either do not want, or cannot due to the sheer volume, to renegotiate the subprime mortgages of American homeowners facing such trouble. Part of the reason may be that banks want the higher interest payments to cover their own losses due to the gambling during the subprime mortgage bubble. Or maybe the banks are paralyzed after facing this deluge of American homeowners losing their homes. Either way, the banks are sitting on a huge supply of homes that are over-priced, that the banks may not be able to sell to cover their loan losses, and that the supply may continue to increase as more Americans lose their homes. So the home values continue to drop. Going back to the NY Times story;

Home values dropped throughout 2008 as foreclosures soared, buyers fled the market and banks tightened their lending standards. In November, the Standard & Poor’s Case-Shiller 20-city price index, a closely watched barometer of the market, fell at its fastest rate on record. The index of home values in 20 metropolitan areas receded to its lowest point since early 2004.

The median home price in December was $175,400, down more than 15 percent from $207,000 in December 2007 and at its lowest point since May of 2003, the National Association of Realtors reported. The lower prices contributed to a 6.5 percent increase in existing-home sales in December.

I do not believe that we are near the bottom of this housing market.

Banks are continuing to tighten access to credit; This is a not-surprising story from The New York Times;

WASHINGTON — Many banks have made it harder for borrowers to obtain loans in the last three months despite a $700 billion federal bailout program and a flurry of other bold moves to stem the worst financial crisis to hit the country since the 1930s.

The Federal Reserve, in its quarterly survey of bank lending practices released Monday, found large numbers of banks reporting tighter credit standards across a broad range of loan products.

Nearly 60 percent of banks responding to the survey said they had tightened lending standards on credit card and other consumer loans, about the same share as in the previous survey released in early November. And about 80 percent of domestic banks said they tightened lending standards on commercial real estate loans, slightly less than the roughly 85 percent that reported doing so in the previous survey.

All told, though, the proportion of banks that “reported having tightened their lending policies on all major loan categories over the previous three months stayed very elevated,” the Fed concluded.

The survey was based on the responses of 51 domestic banks and 23 American offices of foreign banks.

This returns full circle to the auto industry woes, as January sales declined among the car makers by between 30-50 percent. The banks have frozen the credit markets, avoiding lending money to anyone for anything--be it car loans, business loans, credit card loans, and even home loans. It is just one factor in this deteriorating U.S. economy. The banks are facing losses due to foreclosed homes and the speculation of subprime mortgage investments. They are tightening their credit standards, and are using the $700 billion bailout money for everything else but providing loans to American homeowners. American homeowners were foolish enough to jump onto the subprime mortgage bandwagon and purchase over-valued homes, that the banks were happy to lend money to, that these Americans could not afford. And the government regulators, under the Bush administration, were in a coma as the inflated housing bubble exploded into this economic wreckage. It really comes down to a problem of how do we fix the housing crisis, to keep those American consumers who are facing underwater mortgages, to continue paying their mortgages and avoid their homes from being foreclosed. By finding a way to keep Americans paying their mortgages to the banks, the banks will have more money coming in, rather than having more foreclosed homes on their books. Then the banks can hopefully ease up on their credit standards, and hopefully lend out more money in order to stimulate the economy. Again, this is very simplified, but it shows just how much of a problem this economy is facing.

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