From the Wall Street Journal’s Real Time Economics Blog yesterday:
U.S. banks continued to tighten their standards on loans to households and businesses in the second quarter, said a Federal Reserve study that also shows that many banks think the credit tightening trend could continue into the first half of 2009…
About 60% of the domestic banks surveyed reported having tightened lending standards to large and middle-market businesses. That’s up slightly from what was reported in the last Fed survey conducted in April and released in May. About 65% of the institutions, a percentage that is also up from the previous survey, also said they had tightened their lending standards on so-called commercial and industrial loans, also known as C&I loans, to small firms over the same period…
In addition, a significant portion of the banks surveyed reported having tightened their lending standards on prime, nontraditional and subprime residential mortgages over the previous three months. About 75% of domestic respondents, which is up from 60% in the previous survey released in May, said they had tightened their lending standards on prime mortgages. Also, six out of seven respondents that originated subprime mortgage loans, which is a higher proportion than what was reported in the previous survey, indicated that they had tightened their lending standards on those loans over the past three months.
Turning to the results of the survey’s consumer lending questions, about 65% of domestic banks indicated that they had tightened their lending standards on credit card loans over the past three months, which is up remarkably from the 30% reported in the survey released in May.
From Reuters’s John Parry earlier today:
U.S. economic growth is expected to slow more sharply in the coming months than previously forecast with employers shedding staff into next year, according to a Philadelphia Federal Reserve survey released on Tuesday.
Economists lowered their forecasts for third-quarter gross domestic product growth to a 1.2 percent annual rate from the previous 1.7 percent estimate, according to the bank’s quarterly Survey of Professional Forecasters.
“Growth in U.S. real output over the next few quarters looks slower now than it did just three months ago,” the Philadelphia Fed said on its Web site.
In the fourth quarter, the U.S. GDP growth forecast was slashed to 0.7 percent growth, from the previous 1.8 percent forecast…
The current survey also forecast the U.S. unemployment rate would be 5.7 percent in the third quarter, above its previous 5.4 percent forecast, then rising to 5.8 percent in the fourth quarter.
“A weaker near-term outlook for the labor market accompanies the outlook for slower output growth,” the Philadelphia Fed said.
From MarketWatch’s Rex Nutting today:
The U.S. economy faces a prolonged period of anemic growth, but that’s no reason to get complacent on inflation, said Dallas Fed President Richard Fisher in an interview with the Dallas Morning News published Tuesday. “I expect that in the second half of this year we will broach zero growth,” he said. Fisher, a voting member of the Federal Open Market Committee who’s been on the losing side on the past five votes on interest rates, said the credit crunch is worse than the S&L crisis of the late 1980s.
The U.S. employment situation looks increasingly bleak. From the CNBC website yesterday:
Planned layoffs at U.S. companies jumped 26 percent in July from June, depicting further deterioration in the labor market, a report showed on Monday.
Planned layoffs at U.S. companies totaled 103,312 in July, compared with June’s 81,755, employment consulting firm Challenger, Gray & Christmas Inc said.
Announced job cuts at U.S. companies last month were the second highest total so far in 2008, more than double the 42,897 a year earlier, the report said.
The transportation industry hurt by sky-high fuel costs accounted for the most planned cuts in July with 17,051. The financial sector battered by the credit crisis followed with 15,517 cuts. Retailers facing a pullback in consumer spending came next with 12,160 layoffs.
Employment data from the first half of the year was also dismal. According to CNBC:
From January to July, planned layoffs totaled 579,260, up 33 percent from the same period a year ago.
The outlook for Wall Street and the financial sector doesn’t look too good either. From the CNBC piece:
Financial companies, in particular mortgage lenders, have been slashing their payrolls, prompted by billions of losses and write-downs tied to soured investments on housing and mortgages.
So far this year, planned layoffs in the mortgage and subprime sector has reached 92,547, already surpassing the 2007 tally of 86,126.
With no end in sight, job hemorrhage in the financial sector could surpass the last year’s record total of 153,105 by the end of October, Challenger predicted.
Keep an eye out for those used Maseratis…
Source:
“Companies Step Up the Pace of Layoffs” Reuters, August 4, 2008
Aaron Elstein of Crain’s New York Business is a no nonsense kind of guy. Last Friday, Elstein began a piece on Wall Street layoffs with the following sentence:
In the past year, 22,000 New Yorkers who work on Wall Street have lost their jobs, according to a Crain’s estimate. And far more blood-letting is to come.
No sense beating around the bush, right? Anyway, the following is a tally of announced pink slips over the past year, total worldwide followed by estimated number in New York City (in parentheses):
Though cuts have been worst in such hard-hit areas as mortgages and structured finance, bankers in more traditional lines like initial public offerings and advising on corporate mergers and acquisitions now seem vulnerable. IPO volume is down nearly 70% this year, according to Renaissance Capital in Greenwich, Conn., and M&A activity is off nearly 40%, according to Bloomberg data.
The Crain’s reporter also painted a grim picture for aspiring Wall Street players. Elstein wrote:
The city’s Independent Budget Office forecasts that 33,300 Wall Street jobs—17% of the city’s best-paid workforce—will disappear by next year. The IBO estimate, which reflects a 65% increase over the previous projection, approaches the 40,000 local jobs that were slashed when the technology bubble burst earlier this decade.
Richard Berner, Morgan Stanley’s chief U.S. economist, said yesterday at a public finance and pension fund conference in Illinois that the United States is in a mild recession. Berner added that the U.S. housing crisis still has “a long way to go” because of excess supply and caution by both lenders and potential homebuyers. The 2007 winner of the William F. Butler Award for excellence in business economics also warned of an elevated inflation threat which should pressure corporate earnings, contribute to market volatility, and feed a relatively steep yield curve, according to Reuters’ Karen Pierog. She wrote:
U.S. consumers are facing a perfect storm of eroded housing prices, higher energy and food prices and a weaker employment picture, Berner said…
As for energy, Berner said finite supply in the face of rising global demand will keep the price per barrel of oil high.
“My guess is in the next two to three years the equilibrium price will still be north of a hundred bucks,” he said.
More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.
The Journal’s Conor Dougherty wrote on April 24:
…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…
Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.
Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:
But the job expansion could later cause financial problems for governments that are spending too much.
“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”
Ain’t that the truth…
Sources:
“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty Wall Street Journal, April 24, 2008
“Hiring leaps in public sector”
Dennis Cauchon USA Today, April 29, 2008
Yesterday, a senior official in the U.S. Treasury Department said the U.S. economy could improve slightly in the second half of 2008, and that there are some encouraging signs in the credit markets. David McCormick, Under Secretary for International Affairs, said the improvement would be due to a fiscal stimulus of $150 billion, which would help create 500,000 new jobs this year.
The United States has been busy trying to fight off an economic slowdown. Reuters’ Surojit Gupta and Rajkumar Ray wrote yesterday:
To counter the problems faced by the world’s largest economy, the Federal Reserve has cut its benchmark interest rate by 300 basis points since September and is expected to cut the Fed funds rate further at its meeting next week.
It has also provided billion of dollars in liquid funds to near-frozen markets and stepped in to prevent the collapse of investment bank Bear Stearns.
Meanwhile, under a Federal Government fiscal stimulus program, 130 million Americans will receive tax rebates this year and in 2009.
Because of these measures, McCormick said:
We will begin to see a slight improvement in the back half of 2008 and obviously carry that momentum in 2009. But make no mistake, a very challenging time for the economy.
Challenging, indeed. Last week, the head of a U.S. business group warned the world’s largest economy may see a “double dip” recession if stimulus efforts by the Federal Reserve and U.S. government fail to take hold. According to the Agence France-Presse on April 17, Harold McGraw, the head of publishing giant McGraw-Hill and chairman of the Business Roundtable (which represents chief executive officers of leading American companies), said:
If, after the economic stimulus package takes effect and we get into (20)09, and the … lower interest rates do not kick in, there is a probability of (a) double-dip recession…
A growing number of economists and analysts fear that the U.S. economy might slip into a recession, then back again after a brief recovery, in a W-shaped “double-dip” recession.
The French news agency also reported that McGraw, who was in Tokyo for a one-day business summit with business leaders from the Group of Eight (G8) nations, warned that the credit crunch would continue until the end of this year. He said:
I think it will take the rest of this year to unwind but I think it will. It turned (out) to be bigger and broader and deeper than we thought.
Sources:
“Economy seen improving in second half of ‘08”
Surojit Gupta, Rajkumar Ray Reuters, April 24, 2008
“US business leader warns of ‘double dip’ recession” Agence France-Presse, April 17, 2008
Time to dust off those resumes, Wall Streeters. According to James Brown of the New York State Department of Labor, Wall Street could lose over 36,000 jobs due to the housing bust, subprime mortgage meltdown, and credit crunch. Earlier today Brown, a labor market analyst, told Reuters that regarding his forecast of one in five jobs being eliminated, “History suggests it’s going to be something of that magnitude.” Reuters’ Joan Gralla wrote that Brown’s estimate “was almost double the 20,000 job loss over the next two years that the city’s Independent Budget Office forecast in March.”
At the end of March, 182,300 people were working at banks and brokerages, down more than 5,000 since September. According to Brown, the small number of layoffs seen so far likely reflects the lag between the end of severance payments and when job hunters file for unemployment benefits.
Source:
“Wall St may lose 36,000 jobs”
Joan Gralla Reuters, April 24, 2008
Even though there’s more talk of a bottom in the U.S. housing market these days, I’m still not sold. I just haven’t seen any evidence out there which indicates a turnaround. However, I’m not the only one that sees further deterioration in the residential real estate market. Diana Olick, CNBC’s real estate reporter, made some good points yesterday regarding the continued weakness in homes sales. She wrote on her Realty Check blog:
The trouble is that there are a lot of factors working against sales right now — factors that are deteriorating, not improving. Number one is house prices. Sales may be bumping, but prices continue their slide down, and most of the “experts” I talk to think prices have a lot further to go, because foreclosures are mounting, as are inventories.
Then there’s the whole economy thing: We’ve said throughout this housing downturn that it’s unique because usually we see housing recessions in times of economic recession, and this housing downturn came before recession — and may have actually caused one.
Last year, we were still seeing job growth as housing faltered, but now we’ve seen 300,000 private-sector jobs lost in just the past four months. Add that to the credit crunch, and it doesn’t spell recovery for home sales…
In other words, I think we have a ways more to go.
On the topic of U.S. home prices, on Tuesday Yale University economist Robert Shiller said there’s a good chance prices will fall further than the 30% drop experienced during the Great Depression of the 1930s. During a speech at the New Haven Lawn Club yesterday, the founder of the Standard & Poor’s/Case-Shiller home-price index said, “I think there’s a good chance we’ll exceed that this time,” according to the Hartford Courant’s Eric Gershon. Home prices in the largest metropolitan areas across the nation have already dropped 15% since their peak in 2006. But, Shiller noted that real estate cycles typically take years to correct. Talk of the bursting of the housing bubble and subsequent turmoil it has produced led Shiller to warn:
This is the biggest financial crisis since the Great Depression.
Sources:
“Making Sense of Sales (Maybe)”
Diana Olick CNBC, April 22, 2008
“Yale’s Shiller: U.S. Housing Slump May Exceed Great Depression” Wall Street Journal (Developments Blog), April 22, 2008
“Home Prices Seen Falling Further”
Eric Gershon Hartford Courant, April 23, 2008
The Wall Street Journal’s Phil Izzo talked about the latest Journal forecasting survey of 55 economists. Izzo wrote:
The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey.
By a 3-to-1 margin, respondents said the economy is in a recession, and almost three quarters said the economy hasn’t yet hit bottom.
Highlights from the survey included:
• Fed Chairman Ben Bernanke’s approval rating rose slightly to 78 out of 100 from a 75 in February, which was the last time the question was asked.
• U.S. Treasury Secretary Henry Paulson’s rating fell a point to 73 from 74 in February.
• When asked what the biggest downside risk was to their forecasts, 35% of the economists said it was further deterioration in the credit markets, 25% said it was a sharp drop-off in consumer spending, and 13% said it was continued housing weakness.
• The survey group expects the economy to shed 1,625 jobs a month, on average, over the next year.
• They unemployment rate, now 5.1%, is expected to rise to 5.6% by December.
• Just 21% of economists predict home prices will reach a bottom this year. 67% see the bottom in 2009, and 12% say it won’t be until 2010.
• While most of those polled say the U.S. economy hasn’t hit a bottom yet, they expect gross domestic product to expand, on average, by 0.2% in the first quarter and 0.1% in the second, followed by a 2.1% increase in the third quarter.
• The group expects the Federal Reserve to cut its benchmark federal funds rate by another half-percentage point by June, then keep rates unchanged for the remainder of 2008.
Source:
“Economy Has Further to Fall, According to Economists’ Survey”
Phil Izzo Wall Street Journal, April 10, 2008
In a post from yesterday, I talked about how some economists are predicting a deteriorating U.S. economy will take a significant toll on employment (6% jobless rate; 2 million lost jobs). Today, Kelly Evans wrote a post in the Wall Street Journal’s Real Time Economics blog that discussed the findings of the latest Job Openings and Labor Turnover Survey (JOLTS) from the U.S. Department of Labor, which showed that the rate of hiring by American businesses continues its downward trend (nearly two years now), and job openings have slowed over the last six months. Looking at job openings, manufacturing and construction showed considerable weakness, as did professional and business services, which had the largest monthly decline. However, openings in education and health services grew. Overall, the JOLTS data showed that there were a seasonally-adjusted 3.8 million total job openings in February, compared to 4.1 million a year ago at the same time. The “quits rate” also slowed from a seasonally-adjusted high of 61 in December 2006 to 56 in the latest report. Hirings continue to slow as well. In February there were a seasonally-adjusted 4.6 million hirings, compared to 4.8 million a year earlier. Evans wrote:
The JOLTS data confirm the signals from other employment reports that the labor market is slowly shedding jobs. On Friday, the government’s monthly payrolls report found the U.S. economy lost 80,000 jobs in March, following losses of 74,000 each in February and January. Meanwhile, claims for unemployment insurance benefits jumped in the week ending Mar. 29 to their highest level in more than two years.
Source:
“Job Openings, Hirings: The Slowdown Continues”
Kelly Evans Wall Street Journal (Real Time Economics blog), April 8, 2008
Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:
While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.
Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.
Mark Zandi, chief economist at Moody’s Economy.com, said:
All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.
“Safe” Jobs:
• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government
“Unsafe” Jobs:
• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)
Source:
“Job winners and losers in hard times”
Martin Crutsinger Associated Press, April 7, 2008
Some years ago I remember reading an article that said how the employment outlook was incredibly bright for Generations X and Y, as the Baby Boomers were fast approaching retirement age. Because economists and demographers were predicting a huge exodus of Boomers from the workplace, companies were trying to figure out ways to retain these highly-experienced workers.
That was then. But now, says Jennifer Levitz of the Wall Street Journal, the gray tsunami “has run into a breakwall.” Levitz wrote yesterday:
While many Americans are still sitting on large gains from homes and stocks bought years ago, today’s market turmoil is shaping up to be the most painful in decades. Nationally, house prices have fallen 10% or so in the past year. And the quarter ended Monday marked the worst period for stocks in 5½ years, with equities off 15.5% from their October highs…
With their homes worth less, fewer people feel confident enough to retire, even if they plan to continue living in them. And unlike younger workers, they don’t have years to make up for downturns in the stock market. As a result, they worry that their investments will diminish to the point that they won’t have enough money to get through retirement.
Because of the troubled housing and stock markets, increasing numbers of Baby Boomers are putting retirement on hold.
Someday soon?
Levitz wrote:
Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans — with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those 65 and over in the work force rose to 16.2% from 16% in the same time span — meaning 212,000 more hands on deck. So far, the numbers for March continue to show a “sharp” increase, says Steve Hipple, a department economist.
According to the Journal reporter, a recent Schwab survey of 1,006 financial advisers showed nearly a quarter of their clients are looking at working longer because of the poor economy. Levitz also noted:
Seniors delaying retirement could create competition for jobs with younger workers and put more pressure on the unemployment rate, which at 4.8% remains low, but has been edging up in recent months.
Source:
“Americans Delay Retirement As Housing, Stocks Swoon”
Jennifer Levitz Wall Street Journal, April 1, 2008
The following headlines appear on a financial news website this afternoon:
• “As Stocks Rally, What Should You Buy?”
• “A Dollar Rebound? Assume A Best-Scenario”
• “It’s a Good Time to Buy Your First Home”
• “Is the Financial Crisis Over? Some Believe It May Be”
Spring is in the air, and with it, a renewed sense of optimism for the U.S. economy despite the fundamental problems which plague it. Reflecting this upbeat mood, CNN Money reported last Friday that a national CNN/Opinion Research Corp. poll found that 60% of respondents think economic conditions in the United States will be “good” in 2009. Of the more than 1,000 American adults surveyed from March 14-16:
• 83% are “confident” they will maintain their standards of living in 2009.
• 85% are “confident” they will keep their jobs over the next 6 months.
• 90% are “confident” they will be able to meet their monthly mortgage payments for the length of the loan.
Wachovia economist Sam Bullard told CNN Money’s David Goldman:
Most people realize that the economy has cycles of ups and downs. Fortunately, the last two recessions were some of the shortest on record, so in 2009 we should be pulling up out of this… The Fed’s rate cuts will start to take their toll later this year, and the economy should bounce back by the end of 2008.
…so the optimists say.
The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.
-William Arthur Ward (American writer. 1921-1994)
Personally, I prefer pessimists over optimists. You can’t win with pessimists, but at least they sometimes have a “Plan B” ready to go in case of emergency. Optimists, on the other hand, are usually lax in their planning and are more often than not helpless during and after a crisis. Think “bailout.” They sing “Tomorrow” when the situation really calls for “It’s A Hard Knock Life.”
As a realist, my conclusions are based on evidence rather than hopes and fears. The fact is, my research does not show any halt in the deterioration of the U.S. economy. Yet, that’s not to say economic stimulus efforts won’t pay off— at least in the short-term. By then, the risk may be that Washington runs out of “magic bullets.” I’m not the only one who thinks this. Referring to last week’s action by the Federal Reserve to decrease the federal funds rate to 2.25% amidst a 19.7% drop in the S&P 500 Index since its October high, legendary investor Jim Rogers told Bloomberg last week:
What are they going to do when it’s down 30 percent or 40 percent or 50 percent? They’re not going to have any bullets left. They’re not going to be able to solve the problems at that point.
David Gaffen from the Wall Street Journal’s MarketBeat Blog wrote last week:
In fact, some believe the Fed’s move Tuesday was a compromise — a 0.75 percentage point cut instead of a full point in order to “save some bullets in its arsenal in case the market and macro backdrop deteriorate further,” writes David Rosenberg, chief North American economist at Merrill Lynch.
And what will happen should the Fed run out of ammo, or if it proves ineffective? Possibly a double-dip recession like in the early 1980s, according to Lehman Brothers analysts. Reuters’ Richard Leong wrote last Thursday:
The persistent slump in housing will continue to drag on consumers and growth while tight credit conditions, a weakening job market and record energy costs are also taking a toll on the economy, according to economists at the bank…
Lehman economists predicted the U.S. economy will contract 0.5 percent in the first quarter and 1.0 percent in the second quarter, followed by a rebound in the second half. “We expect a feeble recovery in 2009, with the economy threatening to fall back into recession,” Lehman economists Michelle Meyer and Ethan Harris wrote in a research report.
Sources:
“Americans confident in 2009 turnaround”
David Goldman CNN Money, March 21, 2008
“‘Big Rally’ for Stocks to Continue, Jim Rogers Says (Update2)”
Carol Massar, Eric Martin Bloomberg, March 19, 2008
“Is the Fed Running Out of Ammo?”
David Gaffen Wall Street Journal (MarketBeat Blog), March 19, 2008
“Lehman sees risk of double-dip U.S. recession”
Richard Leong Reuters, March 20, 2008
