Posted by Gilmour Poincaree on December 15, 2008

4:00AM Monday Dec 15, 2008

Associated Press


WASHINGTON – Signs that the US recession will be long and severe mounted with a fresh round of bad economic news, including plunging sales from manufacturers to stores and falling prices that raise fears of dangerous deflation.

The widening economic troubles did put a lid on inflation. But they raised concerns about the opposite threat – the potential for a bout of deflation that could drag down incomes, clobber home prices even more and shrink corporate profits.

“Everything is going wrong in the fourth quarter,” said Mark Zandi, chief economist at Moody’s “We have collapses in consumer spending, housing and now investment. Business is just shutting down.”

The new batch of data Friday showed retail sales fell by 1.8 per cent in November, marking a record fifth straight monthly decline.

The weakness was led by another sharp drop in auto sales – the worst sales month for automakers in 26 years. After an auto bailout collapsed in Congress on Thursday night, the White House offered a partial reprieve on Friday for the Detroit Three, pledging temporary help to avoid a “disorderly bankruptcy” for one or more of them.

Treasury Department officials were discussing with the automakers what form that support would take. That gave Wall Street a lift, with the Dow Jones industrials rising about 65 points to close just under 8630.

The stock market has shown signs of settling down the past two weeks. While there’s still volatility, the terrifying lurches of several hundred points at a time have become rarer.

The Dow has closed between 8000 and 9000 for 15 trading sessions in a row.

And on two of the last three days, it has moved only double digits for the day, the first time that has happened since Lehman Brothers went bust in mid-September.

A second report from the Commerce Department showed that all stages of production – manufacturing, wholesale and retail – suffered a record drop in sales in October, the month the financial crisis hit with force.

Businesses trimmed their total inventories by the biggest amount in five years, which probably means more cuts in production and layoffs in the months ahead.

And a Labour Department report showed wholesale prices dropped 2.2 per cent in November, the fourth consecutive monthly decline. They had fallen 2.8 per cent in October, a record.

Wholesale prices have not fallen for such an extended stretch since the period between October 2001 and January 2002, when the country was struggling to emerge from the last recession.

The severity of the current recession, already the longest in a quarter-century, was raising the risk of a period of deflation for the first time in the United States since the Great Depression of the 1930s.

While falling prices for fuel and other products mean people have more to spend on other items, a prolonged stretch of price declines can escalate into falling wages as businesses are forced to slash production costs to compete for sales.

Economists say the threat of deflation is remote but the risks are increasing as the downturn worsens, especially with Wall Street in upheaval and businesses and people having trouble getting loans.

“People are just scared at the moment with the financial markets locked up,” said David Wyss, chief economist at Standard & Poor’s in New York.

Wyss and other economists expect the Federal Reserve not only to cut rates sharply at the conclusion of its two-day meeting Tuesday, but also to signal other novel approaches it may employ to get credit into the system.

The Fed’s target for the federal funds rate, the interest that banks charge each other, is already at 1 per cent, tying the lowest level of the past 50 years.

The 1.8 per cent fall in retail sales in November was concentrated in bad results for automakers and a plunge in sales at petrol stations because of cheaper petrol.

Other businesses, such as department stores, posted modest sales increases.

But economists caution against reading too much into those gains, contending that the weak economy and continued layoffs will likely make this the weakest holiday shopping season for stores since the 1981-82 recession.

All the economy’s woes are expected to show up in a steep drop in overall activity during the current October-December quarter.

Some economists said the gross domestic product could fall by 5 per cent or more in the fourth quarter and keep falling next year.

Wyss said he expects the recession to end in June.

That would mean it had lasted for 18 months, which would be the longest downturn since World War II.

The current record is 16 months. Both the 1981-82 recession and the 1973-75 slump lasted that long.



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