The Coming Recession

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Slowdown beginning...

Fed sees economy slowing
February 20 2008: Central bank cuts growth forecast and sees higher unemployment but hints at more rate cuts ahead to keep economy from recession.

The Federal Reserve cut its economic growth forecast for the economy Wednesday and suggested that more rate cuts could be on the way to combat further weakness. The central bank said it now sees the economy growing at a rate between 1.3% to 2% this year, down from its previous forecast from October of growth between 1.8% and 2.5% for 2008.

The Fed also said it expects the unemployment rate for the year to be between 5.2% and 5.3%, up from the 4.8 % to 4.9% range previously given. Unemployment stood at 4.9% in January, according to the latest reading from the Labor Department.

"I thought it was a much more downbeat forecast of the economy than I've seen from them before, but they're still more optimistic than I am," said David Wyss, chief economist for Standard & Poor's, one of a growing number of economists who argue the U.S. economy has already fallen into recession.

But Wall Street appeared to be relieved that the Fed is still looking to cut interest rates. Stocks rallied Wednesday afternoon despite the fact that the Fed also boosted its inflation expectations for 2008. In addition, oil prices hit a new record-high of nearly $101 a barrel.

Defending the big rate cuts

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Subprime loans defaulting even before resets
February 20 2008: It turns out that massive interest rate spikes aren't the problem -- many borrowers couldn't afford these mortgages even at the low, introductory interest rates.

For months, we've fretted about the Armageddon that will hit when subprime adjustable rate mortgages start resetting to much higher interest rates. What's happening is even worse: Many of these loans are defaulting well before their rates increase.

Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood.

Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates . "I was rather shocked by the characteristics of the 2007 loans," said Youngblood.

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Recession indicators...

The telltale signs of recession
Mon., Feb. 18, 2008 - Here are four indicators with good track records at predicting downturns

The economic data are taking on a new urgency. Recently, a few of the economy's vital signs have been erratic. Most notably, a popular measure of service-sector activity plunged to an all-time low, and payrolls last month posted the first monthly decline in nearly 4½ years. The trouble is, that's what the data often do when the economy is sinking into recession: They surprise, sometimes shockingly, on the downside. Most reports in the coming weeks will almost certainly look glum. But just how glum?

Economists' expectations have dropped sharply in only the past four weeks. The 51 forecasters surveyed by Blue Chip Economic Indicators now expect first-half growth to average only 0.8%, down from their 1.6% projection in January, and the number of outright recession forecasts is growing.

More negative data surprises would validate the pessimists' view. However, four indicators will be especially important over the next few weeks: new filings for unemployment insurance every Thursday, the February manufacturing and nonmanufacturing indexes from the Institute for Supply Management (ISM) on Mar. 3 and 5, and the Labor Dept.'s February employment report on Mar. 7. Why these? They are timely, indicative of broad business trends, and sensitive to swings in activity, and two of them were unexpectedly weak in January.

More The telltale signs of recession - BusinessWeek.com - MSNBC.com

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Watch inflation now!
February 21 2008: Worries about 1970s-style stagflation have moved to the forefront to rival recession fears. Should the Fed be more worried about rising prices?

Recession has been getting so much attention lately that it's been easy to forget about the threats posed to the U.S. economy by inflation. But inflation worries are now back in focus in a major way. Oil prices hit a record of $101.32 a barrel in trading Wednesday, and was briefly above $100 again Thursday

Meanwhile, the Consumer Price Index, the government's key inflation reading, showed a 4.3% rise in overall prices over the past 12-months. That reading has risen steadily from only 2.0% last August. Even stripping out volatile food and energy prices, the so-called core CPI posted the biggest seasonally-adjusted one-month jump in 19 months.

If that wasn't enough to stoke inflation fears, the Federal Reserve raised its inflation forecast for 2008 Wednesday while also cutting its outlook for economic growth this year. This prompted the Wall Street Journal to herald the return of "stagflation" -- the unwanted combination of stagnant economic growth and destructive inflation -- on its front page on Thursday. The New York Times also trotted out the word in a headline Thursday. All of this made some market experts who have been worrying about inflation for a while chuckle on Thursday.

Rising prices were hard to miss

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Now why would anybody want to be President?

The 44th president's $4 trillion headache
February 22 2008: The candidates want to do things like reduce taxes and fix health care. But they'll have to deal with the cold realities of the federal budget.

The presidential candidates all have big plans for their time in the White House. Reform health care. Reduce taxes. Close corporate loopholes. Encourage savings. The list goes on. Like college graduates whose career choices may be limited by their student loan debt, however, the next president could be constrained by the federal budget.According to the Congressional Budget Office (CBO), the annual budget deficit will improve during the next president's four-year term and end in a surplus of $61 billion by 2013.

But that baseline projection is based on financial assumptions that no one expects to pan out. Two of the biggest roadblocks threatening to upend budgetary nirvana: What to do about the looming expiration of tax cuts enacted in 2001 and 2003, and the growing cost of fixing - or nixing - the Alternative Minimum Tax (AMT). Depending on how you address them, those two factors alone could add close to $4 trillion to the federal budget deficit by 2018, according to estimates by the Tax Policy Center. Add in the costs of the wars in Iraq and Afghanistan and the growing costs of Medicare and Social Security, and you end up with something more like a budgetary nadir.

"A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation's long-term fiscal stability," the CBO warned in a recent report. Deficit experts doubt that the candidates' plans will pare back the deficit. "None of the candidates has any proposals that would lead us to believe they would cut the deficit," said Joshua Gordon, senior policy analyst at the Concord Coalition, a deficit watchdog group. They even may add to it, he said. "Their 'pay-fors' are much harder to do politically, and there are fewer of them."


Can they hold the line?

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Cities' bond issues suffer from credit crunch...

Credit crisis hits Main Street
February 21 2008: Bond market woes make municipal borrowing more expensive and that could mean higher taxes and fewer services.

When Wilkes-Barre Mayor Thomas Leighton hears about the troubles afflicting bond insurer Ambac Financial Group, he worries whether his Pennsylvania city can renovate a blighted park or repair the sewer system. Wilkes-Barre, which suffers from a weak BBB credit rating, depends on bond insurance to issue municipal bonds at favorable rates. If Ambac were to lose its AAA rating and its credibility, it could mean higher taxes, fewer services and lost jobs for the people of Wilkes-Barre.

"Without affordable funding, projects don't get built, streets don't get repaved," Leighton said. "It affects the people driving on those roads and the people paving those roads." The credit crisis that began in the subprime mortgage market last year has now spread to municipal bonds. Governments and public authorities face steep increases in borrowing costs because investors are losing confidence in the credit markets and the companies that insure the debt.

Public officials nationwide are now weighing whether to restructure their debt to lower rates - if they have good enough credit ratings - or to ride out the storm with the hope that investors will return. However, some are concerned they may have to raise taxes or cut services to balance their budgets.

Problems with auction-rate securities

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Governors Deal With Tough Budget Times
WASHINGTON Feb 24, 2008 - 'Tough, Very Tough': Governors Across America Wrestle With Tight Budgets, Slowing Economies

Washington Gov. Christine Gregoire should be celebrating her state's robust economy and record exports. Yet sagging tax collections are lowering an estimated budget surplus by $400 million. In this slow economy, states are struggling. People are spending less and state governments are taking in fewer dollars. The financial bottom line is a top worry for many governors in discussions as their annual meeting about paying for public works and energy projects. "Everything's been going great for us and now the national downturn has slowed us up," said Gregoire, a Democrat.

As many as 18 states have deficits, totaling $14 billion in the current budget, and 20 forecast spending shortfalls for 2009 $34 billion when combined. It is so bad that some governors are debating whether to pressure Congress for a second economic aid plan; this one would focus on upgrading roads, bridges and sewer systems. "Stimulus that would focus upon infrastructure would be both great for jobs but also would really speak to a need that we're seeing around the country," Democratic Gov. Tim Kaine of Virginia said on "Fox News Sunday."

Governors cite a variety of factors for their economic woes: proposed new federal rules to limit Medicaid spending; relying too much on one-time sources of money, such as payments from the 1998 national settlement with major tobacco companies; and the sluggish economy. "The hardest thing I'm going to have to do is face foster-care parents, disabled adults and children," said Gov. John Baldacci, D-Maine. In his state, there are back-to-back forecasts of revenue shortfalls of about $200 million. Topping the list of troubled states is California. Republican Gov. Arnold Schwarzenegger faces a deficit as high as $16 billion.

More ABC News: Governors Deal With Tough Budget Times

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Experts say it don't look good...

More top economists forecast recession
25 Feb.`08 WASHINGTON - 45 percent predict downturn this year up from one in four last September

Job growth is faltering, consumer confidence plunging. The fallout from the worst housing slump in a quarter-century grows. Wherever you look, the signs are unmistakable that the economy is in trouble. Because of all the bad news, more and more economists foresee the country falling into a recession, according to the latest survey by the National Association for Business Economics.

The group said in a report being released Monday that 45 percent of the economists on its forecasting panel expect a recession this year. In September, only one in four economists was pessimistic enough to put the chance of a recession at 35 percent or higher. The drumbeat of bad news since last fall has caused many analysts to consider a recession more likely now, said Ellen Hughes-Cromwick, chief economist at Ford Motor Co. and NABE’s current president.

The survey shows that 55 percent still believe the country will be able to skate by without falling into an actual downturn, typically defined as two consecutive quarters of declines in the gross domestic output, the broadest measure of economic health. All the analysts, however, expect growth to slow considerably this year.

The forecasters believe GDP will expand by 1.8 percent this year, which would be the weakest growth in five years. That compares with an estimate of 2.5 percent growth for 2008 made in the previous survey, in November. The new estimate is in line with a downgraded forecast from the Federal Reserve this past week.

More More top economists see recession - Stocks & economy - MSNBC.com

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Greenspan revisin' his prediction...

Greenspan glum on US economy
Tuesday, 26 February 2008, Federal Reserve ex-head Alan Greenspan warns that the US economy could see a deep contraction.

The former chairman of the US central bank Alan Greenspan has warned that US economic growth has stalled and a quick recovery is not likely. "As of right now US economic growth is at zero," he said, adding the longer it stayed this way the greater the risk of a deep recession. Wall Street giants Goldman Sachs and Merrill Lynch have both forecast that the US economy will contract in 2008.

The US Federal Reserve has said 2008 growth will be between 1.3% and 2%. The forecast, made last week, was half a percent lower than the Fed's previous estimation. The gloomy outlook was blamed on falling house prices, reduced bank lending, turmoil in the financial markets and higher oil prices.

More gloom?

Mr Greenspan also predicted that booming oil prices, which reached a record of more than $101 last week would keep rising and that the US housing market would see more misery before the tide turned. On Monday, figures from the National Association of Realtors showed US house prices fell 4.6% to $201,100 (£106,691), while inventories rose.

This adds to the drumbeat of bad news for consumers, including higher unemployment, more expensive fuel costs and higher credit card repayment costs and raises worries about their ability to spend and prop up the world's largest economy. Increased globalisation of trade could offset a sharp downturn in consumer spending and "facilitate the absorption of shocks in the US," Mr Greenspan said.

Foreign investors

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Big-Ticket Manufacturing Orders Plunge...

Big-Ticket Orders for U.S. Manufactured Goods Plunge
WASHINGTON Feb 27, 2008 : Orders for Big-Ticket Manufactured Goods Plunge by the Largest Amount in Five Months

Orders to U.S. factories for big-ticket manufactured goods plunged in January by the largest amount in five months as manufacturers got caught in the weakness engulfing the rest of the economy. The Commerce Department reported Wednesday that new orders dropped by 5.3 percent last month, reflecting declines across a wide swath of industry from commercial aircraft and autos to heavy machinery and computers. The worse-than-expected decline was the latest in a string of reports indicating that the economy, battered by a prolonged slump in housing, a serious credit squeeze and soaring energy prices, is in danger of toppling into a recession.

A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a $168 billion economic stimulus package passed by Congress earlier this month. Millions of households will begin seeing rebate checks in May that should give the economy a boost starting this summer. The 5.3 percent decline in durable goods for January was the first setback since October and was the biggest decline since a similar 5.3 percent drop last August.

The weakness was led by a 13.4 percent decrease in orders for transportation equipment, which reflected a 30.5 percent plunge in demand for commercial aircraft, a very volatile category, and a 0.8 percent fall in demand for motor vehicles and parts. It was the second straight drop in autos and underscored the problems facing domestic automakers as they struggle with weak demand in the face of surging gasoline prices and plunging consumer confidence.

More ABC News: Big-Ticket Manufacturing Orders Plunge

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Granny says, "Dat's right - we's all broke but we don't know it...

Dollar Sinks to All-Time Low Against Euro
Feb 27, 2008 : Weak US Economy to Blame for Dollar's Woes Worldwide

The euro climbed to a record high of US$1.5070 in midmorning European trading on Wednesday as sentiment increased that the U.S. Federal Reserve would continue its rate cut campaign. The 15-nation currency hit a series of highs, culminating in US$1.5071 before 10 a.m. (0900 GMT) before falling back slightly to US$1.5063, nearly a full cent more than the US$1.4967 it bought in late trading in New York on Tuesday, which was equal to the last record high it had reached, back in November.

In other trading, the British pound soared to US$1.9941 from US$1.9862 late Tuesday, while the dollar fell to 106.40 Japanese yen from 107.26 yen. Along with the rise in the British pound, which is nearing US$2 again, the surging euro will not be kind to Americans visiting Europe - they'll have to pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.

On the other hand, the stronger euro makes shopping trips to the U.S. more appealing to Europeans. A higher euro also makes goods from the euro-zone more expensive for customers abroad, or cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant. Howard Archer, the chief UK and European economist for Global Insight, said the euro's strength is not likely to weaken anytime soon, given that any "worsening in U.S. interest-rate differentials dilutes a key support for the dollar."

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White House economist says US should be bankrupt
Thursday 28th February, 2008 - A former White House adviser for four US presidents says America is on the verge of financial and political upheaval unless the country makes substantial changes in the very near future.

Speaking at the University of Utah, Stephen Studdert, author of the book 'America in Danger, What You Must Know to Protect Yourself,' said the country is facing economic threats on various levels, including growing government and corporate debt. He said: 'If the government of this country were a business, it would have to declare bankruptcy.'

Mr Studdert said he was especially concerned about unfunded federal liabilities, especially Medicare and Social Security. During his speech he warned: 'Unfunded pension liabilities on the private-sector side are enormous, while over-obligations that are unfunded by municipalities, state and local governments are troubling.'

The biggest threat to the US, he said, is China's exponential growth that has put it in a position to replace America as the world's foremost economic and industrial power.

'Saudi Arabia has the potential to cause us an overnight economic calamity because our economy is literally dependent upon their supply of oil to us,' he said. Studdert, served as adviser to Ronald Reagan, Gerald Ford, George H.W. Bush and Bill Clinton.

White House economist says US should be bankrupt

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They might have helped had Congress started 6 months earlier...

Paulson: Housing plans to hurt more than help
Thurs., Feb. 28, 2008 WASHINGTON - Treasury Secretary knocks Congress proposals in strongest gov’t objection

Treasury Secretary Henry Paulson said Thursday that various proposals being put forward to deal with the U.S. housing crisis would do more harm than good. While he said the housing correction remains the biggest downside risk to the economy, the problems should be put in perspective. He said that 93 percent of all mortgages are being paid on time and that fewer than 2 percent are in foreclosure.

"So while some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good," Paulson said in remarks prepared for delivery Thursday night before the Economic Club of Chicago. "I'm not interested in bailing out investors, lenders and speculators," he said. "I'm focused on solutions targeted at struggling homeowners who want to keep their homes."

Paulson's comments represented the strongest administration objection lodged so far to a variety of proposals being pushed by Democrats in Congress to do more to help in the housing crisis. Paulson said that dealing with the mortgage problems needed to be a shared responsibility. "If borrowers aren't willing to ask for help or respond to efforts to reach them, there is only so much that others can or should do on their behalf," he said.

Earlier in the day, during testimony by Fed Chairman Ben Bernanke before the Senate Banking Committee, Sen. Robert Menendez (D-NJ), said the government’s response to the rise in foreclosures hasn’t gone far enough. “My concern is we were behind the curve in trying to deal with the issue,” said Menendez. “And my concern is now we seem to be continuing behind the curve in stemming the hemorrhaging that's going on.”

Paulson: Housing plans to hurt more than help - Business - MSNBC.com

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Economy slows to near crawl
Thurs., Feb. 28, 2008 WASHINGTON - Housing slump seen making consumers, businesses more cautious

The economy skidded to a near halt in the final quarter of last year, clobbered by dual slumps in housing and credit that caused people and businesses to spend and invest more sparingly. The Commerce Department reported Thursday that the gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter. The reading — unchanged from an initial estimate a month ago — underscored just how much momentum the economy has lost. In the prior quarter, the economy clocked in at a brisk 4.9 percent pace.

Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the country’s economic health. Economists had thought the newly released fourth-quarter GDP would have been bumped up to a 0.8 percent growth rate. The housing picture looked even more bleak in the new report. Builders slashed spending on housing projects by a whopping 25.2 percent on an annualized basis in the fourth quarter, the biggest cut in 26 years.

And, even though economic growth slowed, inflation picked up — an ominous mix that could spell further trouble for the economy. As if the newly confirmed fourth-quarter GDP figure of 0.6 percent wasn’t chilling enough, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market. Fears have grown that the country is heading for a recession or is already in one.

More Economy slows to near crawl - Stocks & economy - MSNBC.com

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Granny got her money inna credit union...

Fed Head Bernanke Expects Bank Failures
February 29, 2008 - Federal Reserve Chairman Ben S. Bernanke yesterday said for the first time that he expects some bank failures as a result of the spreading financial crisis, while consumers as well as banks will bear the brunt of what could be a protracted economic downturn.

Mr. Bernanke's testimony before the Senate Banking, Housing and Urban Affairs Committee provided his gloomiest assessment of the economy to date and came after the government reported that economic growth approached zero at the end of last year. While maintaining the Fed's official stance that recession can be avoided, Mr. Bernanke discussed the possibility frankly and at length with senators. President Bush yesterday said the economy is plagued by uncertainty but is still growing after posting growth of only 0.6 percent in the fourth quarter. "The housing issue is one that we're deeply concerned about," he said, adding, "We'll make it through this period."

The advent of bank failures is one measure of how deep the downturn has become. The country has not seen widespread bank failures since the savings and loan crisis of the late 1980s, which precipitated an expensive taxpayer-financed bailout, a major credit crunch and a deep recession in 1990 and 1991. Mr. Bernanke expressed confidence there would be no bank failures as recently as last week, so his change of tune yesterday suggests that he recently became aware of banks whose solvency is threatened by what he characterized as a widening credit "crisis."

"There probably will be some bank failures," he said, though they are likely to be among smaller regional banks that are particularly exposed to falling property markets. Wall Street markets, which swooned on Mr. Bernanke's remarks about banks yesterday, have focused on the health of the biggest banks and investment houses, such as Citicorp, J.P. Morgan, Bank of America and Merrill Lynch, which cumulatively have reported more than $150 billion in losses. Despite their monumental troubles, Mr. Bernanke said he thinks the large banks have enough reserves and capital to avoid failure.

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