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March 4, 2007
Hard Landing
By Carlos T Mock
I have been saying since February 17th that the US economy is heading for a hard landing, possibly a recession while Mr. Bernanke even after the collapse of world markets on February 28, 2007 tried to calm the markets by saying the economy is sound.
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“Everyone is entitled to their own opinion, but not their own facts.” Daniel Patrick Moynihan
I have been saying since February 17th that the US economy is heading for a hard landing, possibly a recession while Mr. Bernanke even after the collapse of world markets on February 28, 2007 tried to calm the markets by saying the economy is sound.
I think he is entitled to his opinion, but, let’s again examine facts.
“The world is flat,” tells us Thomas L. Friedman. World markets (specifically China) are collapsing, and they have a great influence on our own economy in the United States. Besides, our own data points the economy in serious trouble.
“Global stocks slumped on Tuesday, with US and European markets driven sharply lower after Chinese equities plunged from record levels on fears of overvaluation, slowing growth and tensions over Iran. Wall Street suffered sharp losses, hampered also by signs of slowing growth in economic activity as durable goods orders fell 7.8 per cent in January.” Financial Times February 27 2007
“Government officials revised their estimate of the U.S economy's fourth-quarter growth sharply lower Wednesday, to a lackluster 2.2 percent annual rate from 3.5 percent, as initial estimates of U.S. corporations' inventory plans proved overly optimistic.” Chicago Tribune March 1, 2007”
The Two Year US Bond has a yield of 4.88% while your 10 year bond has a yield of 4.63% and your 30 year bond has a year has a yield of 4.75%. This in spite of all your prime interest increases this past year. The yield curve for US Treasury bonds has been inverted for a while; a strong signal that the market expects a recession and a clear indication that the Fed may have to lower interest rates in the near future to prevent a crash in the economy.
Gold is trading at $668 an ounce, a sure sign of uncertainty.
"The US economy last year recorded its lowest rate of labor productivity growth in more than a decade, with growth in output per hour worked falling behind the EU and Japan. The fall casts further doubt on the ability of the Federal Reserve to cut interest rates as the US economy slows.
"Research to be published on Tuesday by the Conference Board, the international business organization, shows that US labor productivity in the whole economy grew by 1.4 per cent in 2006 as slower economic growth was combined with a rapid rise in employment.
"Gail Fosler, the chief economist of the Conference Board, told the Financial Times that the fall in productivity growth was unlikely to be cyclical and the result of weaker gains in services' industries, raising "concerns about the long-lasting productivity impact of information and communications technology". Financial Times on January 22, 2007
How about our trade deficit?
"The U.S. trade deficit widened to a record amount for the fifth straight year in 2006, as American purchases of Chinese goods and imported oil more than offset an increase in exports.
"The gap between imports and exports expanded 6.5 percent last year, to $763.6 billion, the Commerce Department said Tuesday. The shortfall increased to $61.2 billion in December from a month earlier, more than economists forecast." Bloomberg News, February 14, 2007
The housing market?
Americans bought far fewer new homes last month, according to government data released yesterday that showed sales fell at the fastest rate in 13 years. Sales of newly built homes fell 17 per cent as the backlog of houses standing empty remained stubbornly high, figures from the Commerce Department showed.
"The slump in home prices was both deeper and more widespread than ever in the fourth quarter, according to a trade group report Thursday.
"Prices slumped 2.7 percent in the fourth quarter compared to the fourth quarter of a year earlier, according to the report from the National Association of Realtors. That's the biggest year-over-year drop on record, and follows a 1.0 percent year-over-year decline in the third quarter.
"In addition, 73 metropolitan areas reported a decline in the fourth quarter, compared to a year earlier. That outpaced the 71 that saw a gain. It was both a record number and percentage of markets showing a decline in the group's quarterly report. Five markets saw prices unchanged." CNN February 15, 2007
More importantly:
"Concerns over risky US mortgage lending mounted yesterday as a key indicator of credit problems hovered at record levels, another small mortgage lender failed and a big homebuilder admitted borrowers' difficulties could damage its business.
"Investor worries over loans made to US borrowers with weak credit histories have grown since housing market activity slumped last year. They were thrown into sharper relief last week when HSBC and New Century warned they had underestimated the spike in defaults on so-called sub-prime mortgages.
A credit derivative index tracking credit risk on sub-prime mortgage bonds has soared to a record high this week. The ABX index, based on bonds rated BBB-, has traded at levels approaching 1,000 basis points- up from 650bp a week ago and about 250bp last autumn." Financial Times, February 14, 2007
And the jobless rates are at an all time low? Not so fast:
"The US manufacturing sector contracted unexpectedly this month as factory activity fell to its slowest pace in nearly three years, according to a fresh survey.
"The Institute for Supply Management said its manufacturing index fell into negative territory in January as it slipped below the 50 mark to 49.3.
"The poor performance underlined economists' fears that the sector could be sliding into recession." Financial Times February 1, 2007
Companies are announcing layoffs by the thousands:
"DaimlerChrysler is leaving all options on the table for its unprofitable Chrysler unit, the German-American carmaker said on Wednesday. DaimlerChrysler is expected to announce the closure of US plants and elimination of at least 10,000 jobs later on Wednesday, when the company makes its annual results announcement in Detroit for the first time later on Wednesday." Financial Times, February 14, 2007
"Hershey, the largest US chocolate maker, is to cut over 10 per cent of its workers in a reorganization of its manufacturing that will include building a new factory in Mexico.
"The company said it expected to cut about 1,500 jobs over the next three years from its current workforce of more than 13,000. It will also reduce the number of manufacturing lines it operates by almost a third as it seeks to reduce costs.
"The restructuring is expected to cost $575m but deliver annual savings that will rise to between $170 and $190 by 2010, the company said." Financial Times February 16, 2007
"A cloud of uncertainty among the world's phone companies left Alcatel-Lucent with a bruising net loss Friday in its first quarterly report as the world's largest telecommunications equipment maker, and the company moved to eliminate thousands more jobs.
"The company cited 'challenging market conditions,' hesitation from its customers and challenges from regulators, and it raised the number of jobs it was eliminating as part of its merger by 3,500 to a total of 12,500 positions." Financial Times February 8, 2007
"Ford Motor on Thursday reported a net loss of $12.7bn or $6.79 a share for 2006, the largest in its 103-year history and one of the largest ever for a carmaker.
"The figure exceeds the $10.6bn net loss reported by General Motors in 2005, previously the largest reported in recent years by any of Detroit's troubled Big Three automakers.
"Ford's net loss includes a total of $9.9bn costs associated with its restructuring efforts and fixed impairments. Before Thursday's announcement, analysts had said they expected Ford to take large charges on its earnings in order to reflect the full brunt of its massive ongoing restructuring.
"The company's largest previous net loss was $7.3 bn in 1992, and it reported net income of $1.4 bn, or 77 cents a share in 2005." Financial Times, January 22, 2007.
Because of these facts, I don't agree that the market is heading for a soft landing.