The Dow Jones Industrial Average fell below 8600 Thursday - bleeding another 7% to continue the incredible losses that have taken place all week. It seems like the much anticipated bailout has not had the effect that many anticipated - rather than assuaging investor concerns that the worst of the financial crisis was over, it was an inadequate levy in a flood of capital out of the equity markets and into more stable gold and treasury bonds.
And there’s reason to believe that the markets will keep falling in the great financial crisis of 2008. Some major macroeconomic indicators point to tough times in coming quarters.
Here’s a top 5:
1. The U.S. unemployment rate has increased to 6.1%, with 84,000 jobs lost in August 2008 alone. Year-over-year employment is now negative, meaning there were more Americans with jobs in August '07 than in August ‘08.
A peek at the monthly unemplyment percentages for each month since 1998 show that we’re just a tick below a 10-year high (6.3% in 2003) - and given the economic climate, that number’s not going to shrink. 8.0% unemployment is likely…and the 10% high not seen since 1982 is even a possibility.
2. U.S. corporate tax levels are among the highest in the world, at up to 39% of a company’s income. In a credit crunch that’s making it harder for American corporations to raise money to finance growth, this tax burden is going to make it a lot harder for companies to grow, or to give their employees raises. And this means a higher unemployment rate, and lower consumer spending levels - in a vicious economic cycle that will exacerbate a recession.
3. The U.S. national debt is at an unprecedented $10 trillion level. It’s useful to compare the national debt to the gross domestic product (essentially what we owe to how rich we are). The debt-to-GDP ratio was at its lowest point since 1931 when Ronald Reagan took office. It climbed for 12 years under Reagan and the first George Bush, but Clinton reversed the trend. Under George W. Bush, however, the debt has gone back up, hitting 69% of GDP on Sept 30. That’s the highest the ratio’s been since 1955 - and of course, the $10 trillion that we owe is a historical high.
4. Over 70% of U.S. GDP comes from consumer spending. And for the first time, spending habits are reversing in America. For years, the savings rate in the U.S. hovered on 0 - but in 2008, it's climbing to a net gain for the first time in 10 years. In May 2008, for example, when government stimulus checks hit mailboxes, the U.S. savings rate jumped to 4.9%. And given the dour news coming from all economic fronts, and the sorry state of the retail industry as one company after another reports lower earnings, it looks like savings accounts will continue to get pumped with cash as Americans put their dollars away for the future. That’s bad news for an economy that’s in desperate need of liquidity.
5. Inflation and the continued weakness of the U.S. dollar. As worldwide demand for commodities continues to climb, prices for oil, corn, coal, wheat, and the other staple inputs won’t hit the floor. While oil and gas prices have fallen quite a bit since huge historical highs in summer 2008, they are still hovering around $90 - quite a difference from 2007, when prices were below $60 a barrel.
And while prices at the gas station and grocery store have never been higher, weakness in the U.S. currency means that each dollar earned buys less. On July 15, the U.S. dollar hit an all-time low against the euro. And as it gains one day against other benchmark currencies like the yen and euro, but loses ground the next, there isn’t much confidence among investors that the dollar will quickly reverse its recent losses. There’s some upside to this that actually may help the economy - U.S. companies that do a large percentage of business overseas will profit when foreign earnings are converted back into U.S. dollars, for example - but ultimately a weak currency is a poor long-term indicator for the economy’s growth.
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