The Economy Won't Be Ignored

Prices of Treasury coupon securities have posted solid gains in overnight trading as financial markets remain very volatile. The yield on the benchmark 2 year note has declined 6 basis points to 1.90 percent. The yield on the 5 year note has tumbled 9 basis points to 2.89 percent. The yield on the 10 year note dropped 8 basis points to 3.74 percent. The yield on the 30 year bond fell 7 basis points to 4.24 percent.

There is no ostensible reason for the decline in yields, at least nothing which jumps off the screen and grabs you. As I noted in the previous paragraph, some of the movement results from the very high level of volatility. That will remain with us until investors make sense of the credit crunch and the rescue package associated with it.

In Japan the Tankan survey turned negative for the first time in 5 years as large companies expressed pessimistic sentiment on the economy.

In Europe manufacturing PMI fell to its lowest level in nearly 7 years as the index fell to 45.

In the UK the manufacturing PMI fell to a record low of 41 as levels of new orders, output and employment slumped in September.

There is quite a spate of data in the US today with the ADP employment report, the Purchasing Managers Survey, and construction spending set for release. Participants also will have an opportunity to gauge the condition of the consumer with the release of September car sales.

Actually, as I reflect on the topic I suspect that once the bailout bill has  wended its way through the Congressional thicket, the focus of financial market participants should shift back to the real economy. The picture will be very gloomy.

Financial headwinds have increased and the turmoil in the credit markets is akin to the Federal Reserve raising rates. Credit is scarce and increasingly difficult to obtain.

Housing led us to this place and some stability in that sector would be comforting. The Case Shiller report released yesterday is a cold shower for anyone looking for a quick resolution of the problems in that sector.

The export sector has been the main reason that the US has not slipped into recession. The economies of our principal trading partners are slipping and it is unlikely that exports can provide the same boost in upcoming quarters.

The Durable Goods report manifested some signs that business spending had slowed noticeably.

Initial jobless claims remain elevated . The labor market is weak and as the consolidation of the financial business proceeds businesses will shed more workers. There is certainly no impulse to add staff.

Against that background and the completion of the tax rebate program consumption is slowing markedly and some pundits expect the first outright contraction in consumption since the recession of 1991.

So the economic backdrop is weak and even if the bailout bill passes I do not think that it can overcome the combined forces already at play in the economy.

Comments

[investor88:]

John may have correctly assessed the situation in this article, ie bleak outlook despite the mega bailout fund now passing through the US Congress and the Senate. Article's title is appropriate, " The economy won't be ignored".

2008 Oct 01 09:31 AM

[Smarty_Pants:]

A good general summary. One other positive observation is that most well run businesses don't require credit to run day-to-day operations. The businesses who really NEED credit are the mega-banks whose reserves are crumbling and they are the ones who don't trust each other's balance sheet numbers. They are reaping what they have sown during the over-leveraged days of speculation and super-sized profits. They borrowed, gambled, and lost. Now it's time to pay the piper and they hope to drop their mess into the taxpayer's lap.

The chief fear for Main Street is the consumer retrenching and beginning to save more rather than spend as the article points out.

Things will be difficult for the forseeable future, but people will get through it and adjust with a little belt-tightening regardless of what happens to Wall Street. The ones who will really feel the pain are the high-rolling debt junkies on Wall Street.

2008 Oct 01 09:45 AM

[Lilguy:]

I think this article highlights the context for opposing the proposed bailout of Wall Street.

The proposed legislation does not focus on the right problem. The critical underlying problem in our economy is the growing number of foreclosures and associated decline in the US real estate market. This bill will not address the core problem in any meaningful way.

The proposed legislation is inadequate to the task it is intended to tackle. Although $700 billion dollars is huge sum, the Treasury and Federal Reserve have already extended over a half-trillion dollars in direct aid or guarantees to Wall Street—and credit conditions have worsened.

The proposed legislation will not result in significantly expanded credit available from Wall Street to Main Street. Because of their huge leverage—20-30 times their capital—the banks will need virtually every sent to shore up their capital reserves. The half-trillion dollars already extended to Wall Street has accomplished nothing in easing credit conditions.

The proposed legislation will ultimately leave the US taxpayer with hundreds of billions of dollars in losses added to the national debt and our taxes. To make any sense at all in achieving its intended goal, Treasury will have to pay a premium for this toxic financial waste. The taxpayer will ultimately eat this waste no matter what warrants, equity, or other arrangements are introduced.

The additional national debt and taxation burden will come at a time when Americans will be in a substantial recession and least able to afford it.

2008 Oct 01 09:45 AM

[SeeTheLight:]

Plus, the new bailout has tax breaks. So its back to the policy that got America into this mess in the first place, run up the debt, pay for it later.

Except the price tag of paying it later gets more and more expensive. Long term effect of the bailout, net negative. Sadly the original bailout was less damaging long term. But it's an election year. Throw money out the windows.

I understand you need to grease the financial engine here, but the right way was to increase taxes, not increase debt. The pass the buck policy of America continues. More credit, cheaper, bubble onward.

Fool me once shame on you, fool me twice shame on me.

2008 Oct 01 09:48 AM

[naturalsol:]

free money's a patch... however available credit is our economy's lifeline...

pretty grim, slim.

2008 Oct 01 09:50 AM

[thedozer:]

simple d,

how can't you see that we borrowed our way into this mess, both the Government, business and people. You can't borrow out.

it's time the money be put on the table...but it ain't here! NOBODY has any... it's all credit!

Greenspan started all this with the low interest rates... and government issued stimulus checks... it was all borrowed money! There is no money

2008 Oct 01 10:03 AM

[thedozer:]

Bigger fear, Taxes isn't the answer. Paying down the debt is what we should do.

You don't raise taxes on the 20% of Americans that are already funding your 80% GDP entitlement program!

How much is enough??? Cut entitlement, privatize ss, cut all gov. programs.

you aren't 'entitled' to whatever your neighbor has in this country
I don't care if you were born with 8 thumbs on your left hand.

Tough

2008 Oct 01 10:07 AM

[OilyGasMiner:]

John
The yields are a product of investors emotions, and level of confidence in their economy. Though I believe these figures are frequently tampered with by the FED. What I am now concerned with is since the failure of the bailout “attempt” there has been modifications made to Guidance. Yesterday the modified the ‘mark-to-market’ rules for the financial industry. With this new bill passing this will allow banks to “subjectively” modify various financial figure which will skew earnings while being inconsistent with true cashflows. And YES the economy is weak, and investors will continue to overreact on every major PR released. Why? With the SEC modifying our fundamental valuation methods, we are now in the dark and no one will truly no what the ACTUAL value is of the various financial statements. What are we to do? Source<br>

2008 Oct 01 10:44 AM

[OilyGasMiner:]

sorry here's the link to my SEC source www.stockresearchporta.../

2008 Oct 01 10:45 AM

[Jackson Cash:]

I completely agree with thedozer. Tough love.

Don't insult those of us with good behavior, don't buy illegals free houses.

2008 Oct 01 10:54 AM

[Socialism c...:]

@BiggerFear:

"I understand you need to grease the financial engine here, but the right way was to increase taxes, not increase debt."

Nope. The right way is *dramatic* decrease in taxes, and doing that without increasing the deficit by also dramatically slashing government to the core. It so happens that *over*-taxation is the root of the problem. We are being gouged, my friend. We have gotten used to a credit-based life to make up the difference between what we used to take home and what is now being left to us. When I see over 40% of my gross lopped off the top every paycheck, for federal taxes alone...there's something seriously wrong, and unsustainably so!! Is it any wonder middle-America can't afford a mortgage...and that we think we need one to begin with? My grandparents were poor...their house was small, by anyone's standards...but they were able to work a few years and buy it outright. Few can do so today...and the banks and government are fine with us thinking that is normal.

I'm sorry...but it is not. It is past due for government to be cut to the core functions...and to return to the American people what is theirs -- our FREEDOM and our MONEY. This...and only this...will grease the wheels, because to get out of a credit-swamped boondoggle, you have to take the big spending machine out at the knees, not give it a haircut.

2008 Oct 01 12:01 PM

[SeeTheLight:]

@ Socalism... So your recommendation is to cut taxes and cut spending more than you cut taxes? Remember the US is already running a deficit. So if your policy is to cut taxes, (which the bailout plans to do), you will need to cut spending as follows:

spending cut >= tax cut + annual deficit

Ok, I'll play along. Where to cut? Medicare - what medicare? Defence - would be nice to get the troops out of Iraq, but what about Iran's nukes, social security? - its already not enough to retire on, why not zero that out.

America already has the smallest spending of the G7 countries (yes the rest are socialist countries). But hey, perhaps the US can be run on a dollar fifty.

I think you are dreaming, cutting spending just means you end up paying for it anyways. Not in tax but the price in goods.

It really is irrelevant, either solution could work, the key being that the US can not keep running a deficit and increasing the debt.

2008 Oct 01 12:12 PM

[SeeTheLight:]

Sorry when I said "smallest spending" above I meant "smallest per capita spending on government programs"

2008 Oct 01 12:15 PM

[Duude:]

Interesting video on the roots of this crisis;

www.youtube.com/watch?...

2008 Oct 01 12:57 PM

[Socialism c...:]

Yeah, definitely cut spending at least as much as taxes! As long as both are drastic cuts! What to cut? I'll start with a few and let others add to it with their knowledge of the waste (it's gotten so big, can any single person even keep track of it all??):

1) Federal Department of Education: we need this why? I think we've all seen how well pulling education strings from the federal level has worked these last few decades. Kill it. Let the states run their education systems.
2) Social Security -- phase it out. Now. Don't kill it totally right away...we all acknowledge that there are those already retired who depend on it. Institute a reduced payment curve beginning with anyone 10 years away from retiring on down. Get less the further from retirement you are...but also pay less in. Actuaries can work out the schedule so that those retired or less than 10 years from retiring won't see a difference and so that those of us left to pay will start seeing reductions in our withholding for it over time.
3) Medicare -- same deal. We know some depend on it. Universal health care is not the answer to high costs. Medicare is one proof of it...it has actually *contributed* to the costs via Medicare fraud! And we continue to grow medicare -- we never should have added prescription benefits. Phase it out. Socialism does not work. In the same way that it removes incentive from the work force, it removes the fiscal incentive to live healthfully when you know the government is paying for whatever healthcare you need.
4) Kill all contributions to the U.N. The U.N. is a farce. It has long since deviated from its original mission, and is now simply a boondoggle for the U.S. to hinder our foreign affairs. We are always bound by the resolutions (or waiting for one to pass), while the rogue country we are trying to resolve an issue with never follows the U.N. resolution. Need I even start on the corruption, vote-buying in the Security Council, Food for Oil scandal, etc.? Pull out already!

Here's an index containing all U.S. agencies. Staggering to say the least!!
www.usa.gov/Agencies/F...

What should not be cut...these core functions:
1) national defense
2) basic infrastructure (roads, bridges, airports)
3) needed regulation of business and markets
4) food and drug safety oversight

The rest can GO!


On Oct 01 12:12 PM BiggerFear wrote:

> @ Socalism... So your recommendation is to cut taxes and cut spending
> more than you cut taxes? Remember the US is already running a deficit.
> So if your policy is to cut taxes, (which the bailout plans to do),
> you will need to cut spending as follows:
>
> spending cut >= tax cut + annual deficit
>
> Ok, I'll play along. Where to cut? Medicare - what medicare? Defence
> - would be nice to get the troops out of Iraq, but what about Iran's
> nukes, social security? - its already not enough to retire on, why
> not zero that out.
>
> America already has the smallest spending of the G7 countries (yes
> the rest are socialist countries). But hey, perhaps the US can be
> run on a dollar fifty.
>
> I think you are dreaming, cutting spending just means you end up
> paying for it anyways. Not in tax but the price in goods.
>
> It really is irrelevant, either solution could work, the key being
> that the US can not keep running a deficit and increasing the debt.

2008 Oct 01 03:14 PM

[Smarty_Pants:]

We pause for a moment in this discussion to bring you this message from the US Government:

"DON'T PANIC!!!

Everything will be fine as soon as we get some more of your money."

We now resume your regularly scheduled debate:

2008 Oct 01 04:28 PM

[thedozer:]

I should temper my comments... I don't want a depression, but I am angry and I'll do whatever it takes to preserve my children's future!

2008 Oct 01 05:47 PM

[Drew Horn:]

After reading the comments it became clear that the most significant approaching change is a major reduction in consumer credit and spending (75% of all econonomic activity). This change hasn't been recognized as the factor that will have the greatest influence on the US and world economies! In my view, reducing consumer spending and debt is both necessary and will lead to a more sustainable economic balance.

2008 Oct 02 10:27 AM