Friday, October 31, 2008

Scared yet?

The stock market is now nearly 1,000 back above the value that it should be, which for some strange reason many people are taking as a good sign. However, I would not hold my breath on the economy getting better anytime soon. People simply cannot afford to buy the things they need or want.

The New York Times
Economy Shrinks With Consumers Leading the Way
Published: October 30, 2008

...“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

How could there be, with the Robber Barons cutting jobs right and left? Other newspapers concur - people are simply not buying.

The Washington Post
In Tightfisted Turn, Economy Contracts
Drop in Spending Is Drag on Growth
By Neil Irwin and Lori Montgomery
Washington Post Staff Writers
Friday, October 31, 2008; Page A01

...Personal consumption expenditures fell at a 3.1 percent annual rate in the third quarter, the government said yesterday, the worst decline since 1980. The data show that even before the financial crisis deepened in October, American households were being walloped to a degree that has no recent precedent. Conditions, economists said, are almost certain to get worse before getting better.

"This is a major about-face in consumer spending," said Robert A. Dye, a senior economist with PNC Financial Services Group. "It's no surprise why. We've had a drop in the value of houses and stock portfolios, a very weak labor market and a tightening of credit."

...Many analysts think the country is already in a recession -- although the panel of economists that makes such determinations has not yet ruled -- and that the economy will contract at perhaps a 3 or 4 percent annual rate in the final three months of the year...

...The negative turn in consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- shows how severely the financial crisis has affected Americans' ability to buy the goods they are used to buying. In the 2001 recession and aftermath of the terrorist attacks that year, by contrast, Americans kept spending despite millions of lost jobs.

There's one major difference now. In 2001, consumers could borrow money -- with credit cards, for example, and home equity lines of credit -- to get through bad times without necessarily curbing their overall spending. Now, credit is hard to get, which means many people cannot support standards of living artificially boosted by the now-ended lending boom. Those who suffer short-term setbacks have less ability to ride out the bad times.

...The result: The freight train of American consumption has been derailed. Purchases of durable goods fell at a remarkable 14.1 percent annual pace, as Americans pulled back on their demands for automobiles, home appliances and other big-ticket items that often require credit to purchase.

...Even spending on nondurable goods -- food, clothing and items expected to last less than three years -- fell 6.4 percent...

..."The underlying data in this report is weaker than the headline number would suggest," Bryson said. "We're going to get a nasty number in the fourth quarter."

Economists testifying yesterday before Congress's Joint Economic Committee said the new GDP numbers reflect a recession that began earlier this year and is likely to last through 2009. New York University economist Nouriel Roubini predicted that it would be the nation's worst downturn since the 1930s.

"When it walks and quacks like a recession duck, it is a recession duck," Roubini told lawmakers, citing depressed economic growth, rising unemployment and grim news from nearly all sectors of the economy...

No joke. And just for fun, Congress plans to loot what's left of your 401(k). And no, this is not a Halloween prank.

Investment News
House Democrats contemplate abolishing 401(k) tax breaks
Mandatory contributions from workers considered
By Sara Hansard
October 12, 2008

...The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

"I want to stop the federal subsidy of 401(k)s," Ms. Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."

Isn't that sweet?

And, for good measure, don't be fooled by the temporary decline in oil prices. That's the sound of people's ability to afford driving washing away, not the sound of new oil deposits making gasoline available in unlimited amount forever.

The Peak Oil Crisis: A Steepening Slope
By Tom Whipple for the Falls Church News Press

...Keep in mind the basic proposition of peak oil that the world is still burning oil at the rate of 31 billion barrels a year. Seventy five million barrels a day are coming from currently producing fields that with each passing year will produce anywhere from 4 to 8 percent less oil. It is simple arithmetic to show that with current production declining, fewer new oil producing projects under construction, and major declines in demand a dubious proposition, shortages are in the offing. Thanks to the worsening economic situation the effects of declining oil production - much higher prices and shortages - look to be even closer and more severe than before the financial crisis emerged. Falling prices at the gas pumps are only a temporary distraction: the real troubles are getting closer all the time . . .

Scared yet? I am.

No comments: