11 Apr 2008 The Storm before the Calm
It has been a tough week of news for the economy and business. US Consumer confidence dropped to the lowest level since the crash of ’87. GE reported disappointing quarterly and projected earnings sending their shares tumbling the most since 1987. Frontier Airlines, out ofDenver, was the fourthUSairline to declare bankruptcy in the past three weeks. Last, but not least, the US Congress has set a dangerous precedent on trade by halting cooperation with the Executive Branch and holding up a pact with Columbia. If the gambit is pushed it may affect numerous other negotiations and slow global commerce at a time when theUSis heavily dependant on exports.
The consumer is facing record gasoline prices, rising food prices, higher utility bills, with declining job and credit prospects, so there’s little surprise that the survey results are so weak. Economists believe that consumer spending in the first half of 2008 will advance at the slowest rate in 17 years, according to economists surveyed by Bloomberg News. But, it not a guarantee that consumer spending will follow the surveys, though spending patterns are definitely changing. Wal-Mart and Costco are seeing dramatic increases in same store sales as consumers seek bargain prices. The government also reported this week that theUStrade deficit unexpectedly widened in February as Americans bought more imported cars and other goods.
There was a bit of good news on the job front as the number of Americans filing first-time claims for unemployment insurance last week fell the most since September 2005. But the more important number showed that those remaining on benefits rose to the highest in almost four years. It’s clear that jobs are deteriorating, but as several economists have noted, the declines have been orderly and have not reached levels one might expect in a recession.
If you flew in the past three weeks you were likely impacted by unusual turbulence in the airline industry. Skybus Airlines, Aloha Airgroup, ATA Airlines, and today, Frontier Airlines have all declared bankruptcy in most cases, leaving passengers in the lurch. The first three blame the soaring cost of jet fuel (up 78% in the past year according to Bloomberg). Frontier blames their woes on temporary cash flow problems they say are the result of tighter credit policies of a major lender.
American cancelled 3,082 flights this week stranding more than 300,000 passengers. American’s decision comes following the Federal Aviation Administration’s spot checks findings that wiring bundles in the jets’ wheel wells didn’t comply with an FAA order, even after inspections of the MD-80 fleet for the same issue in March.
The events highlighted so far are largely normal and expected of a slowing economy. And in a presidential election year one also expects considerable political gamesmanship. But when the pawn represents international trade, at a time of unprecedented global inter-dependence, we must weigh the potential consequences. Nancy Pelosi, in a dangerous and unprecedented move herded her Democrats to vote 224-195 yesterday denying President Bush’s request that Congress vote on a trade pact withColumbiawithin 90 days. The move upended over 30 years of trade consensus between theUSexecutive and legislative branches, according to Bloomberg. Eliminating the deadline allows Democrats to postpone a decision on the agreement until after the November elections.
The total of trade with Columbia comes to only three weeks worth of trade with China in comparison. It is not the trade, but rather the message we send to our global trading partners that is important. If this move is a sign of things to come, all recovery bets are off.
Last week we noted that the stock market bounced significantly off a bottom. A similar case can be made that the bond market is confirming an economic collapse has been avoided. Interest rates are likely bottoming as bond investors are talking about stability returning to the market. Bloomberg points out that the bond market’s turning point came when the Fed promised $30 billion to back New York-based JPMorgan’s bailout of Bear Stearns, preventing the biggest collapse of an investment bank. Mr. Bernanke believes that fiscal and monetary measures taken so far are substantial enough to bring the economy back into expansion in the second half of the year. We agree.