07 Apr 2008 Call it – time of recession is . . .
“We are in a recession” according to Warren Buffett. “Across the board I am seeing a significant slowdown,” he said on CNBC television. Fed chair Ben Bernanke in his Senate testimony last week said that “the economic situation has become distinctly less favorable.”
More and more investors, analysts, economists, and talking heads are using the term without reservations and caveats present a few weeks ago. Robert Toll of the high-end homebuilder Toll Brothers noted that “ceaseless talk of a recession continues to dampen the mood of consumers. This drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines.”
It’s doing more than that. Job creation in theUSeconomy fell for the second consecutive month by the most in five years. The unemployment rate fell to 4.8% as people gave up their job searches. Manufacturing payrolls dropped by 52,000, the biggest decline since July 2003, after falling 31,000 in January.
But workers are working harder an producing more. Productivity, a measure of efficiency, rose at a revised annual rate of 1.9% after a 6.3% gain in the previous three months. Rising productivity helps contain wage price increases which tend to be the strongest force in generating inflation.
Auto sales declined by 6.3% last month, which was the industry’s seventh since June. Sales this year are projected to be 15.5 million, the lowest since 1998. The industry’s annualized sales rate for February fell to 15.4 million cars and light trucks from 16.6 million a year earlier, according to Autodata Corp.
Here’s an idea to boost auto profits in a declining market. Perhaps the most useless piece of equipment on the American automobile today is the turn signal. Let’s say the entire system of wiring, bulbs, lenses, fuses, power, and control components average price of $500 per vehicle. And to sell the deal, Detroit might propose sharing with the government’s alternative fuels programs half of the savings they generated by eliminating the turn signal from every car sold in the US, they could generate an extra $3.8 billion in profits on their half alone. That’s more than 10% of last year’s profits for the entire industry. It might even save some jobs – just a thought.
On the bright side, the government announced on Wednesday thatUSservice industries, about 90% of the economy, contracted less than forecast last month.
The index rose to 49.3 from a record-low of 44.6 in January. Anything below 50 represents contraction.
The one remaining area of strength in the economy is exports. The benefits of a weak dollar and growing economies in countries such asChina,BrazilandMexicostoke demand for American goods to modernize their infrastructure and production capacity. Reports show that exports remain quite healthy and are at record levels.
On the monetary front, Europe, under the leadership of Jean-Claude Trichet and Mervyn King of the Bank of England continue to risk stalling their economies by holding rates considerably higher than those in theUS; their fear of inflation exceeds that of recession. Perhaps rich diets afforded by salaries three times that of Ben Bernanke’s have fogged their judgment.
The US Fed, exorbitantly more proactive, is adding as much as $200 billion to the banking system over the next month to offset a deepening credit crisis. The Fed also said that it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets including mortgage-backed bonds. Many believe that the Fed will again reduce the funds rate by as much as .75% at or before their next meeting March 18th.
Year-to-date the S&P 500 index is down 11% and the NASDAQ index has fallen over 16%. Gold on the other hand is up over 17% for the year as oil and other commodities rise. A few notables like Cisco, Apple, and Microsoft have boosted stocks in the last few days on more positive outlooks for sales and specific product offerings. We like technology stocks here as they have the best earnings potential if business continue to seek to improve their productivity through investments in technology rather than by boosting workers.
We are looking for positive signs that the credit crisis may be reaching a climax, such as the assurance that bond insurers will maintain their top credit ratings, that the various auction markets that have all but shut down find ways to re-open, that Europe will reduce interest rates, that hosing prices stop falling, that foreclosures reverse, and that ‘pent-up demand’ for new houses will kick in. Ambac Chief Executive Officer Michael Callen said that he expects it will take six months to restore customer confidence in his ratings credibility. Banks may be nearer than that to understanding the losses they face, if prices of yet another asset class don’t loose their footing. Yes there are others, commercial asset values to name a huge one. But for now, let’s hope that lower rates, greater liquidity, fiscal stimulus coming next month, and some stability all bode well for a recovery in the fall of this year. Maybe we can even be out of it before the recession is officially declared by the government.
Have a nice weekend.