Recession stares on world's largest economy

Fri. October 10, 2008; Posted: 09:14 PM

(RTTNews) - The $700 billion bailout package passed by the House and signed into an Act by the US President George W Bush last week was meant to rescue the financial sector from a collapse and induce confidence in the market in particular and the economy at large. However, it has failed to elicit the desired response.

The economic data released during the week also reaffirmed the fact that the US economy is slowly but surely marching towards the recession, which, many analysts believe, will be worse than initially thought.

The fiat currency regime or the expansionary cycle, triggered by the paper currency created by the banks out of thin air is showing clear signs of vanishing into where it came from - thin air - and the inter-bank rates have started moving in the northward direction, indicating a lack of appetite among many international banks to lend money to other banks.

Rapid expansion in money supply in the economy pursued by the Federal Reserve as part of its efforts to help US economy emerge from the recession way back in 1992, without adequate backing in household saving, is attributed as the prime reason for the present day scenario in the economy. The sharp rise in the artificial value of capital goods as well as real-estate assets, primarily due to speculative activities in the market place, has turned out to be a bubble waiting to burst at the slightest default.

The sharp rise in the commodity prices due to demand from emerging economies such as China and India, a surge in oil prices to $147 a barrel in July, the sub-prime crisis due to increasing delinquencies and foreclosures, and the failure of the banks to meet its obligations, provided the necessary trigger for the bubble to burst.

Rising inflation, an increase in the number of people seeking jobs due to more job cuts, especially in the real-estate and financial sectors, lower than projected growth in the GDP, increasing defaults and foreclosure notices, either jointly or severally contributed to the downfall of the stock market index, which is perceived as mirror of the economy foretelling 6 to 9 months ahead of time how the economy will fare in the days to come.

Non-farm payroll has been on the decline since the beginning of this year and the unemployment rate is at 6.1%. Rising unemployment or loss of jobs will automatically impact earnings and thus the consumer spending, which accounts for about 66% of the US economy.

The trade balance report for August showed a deficit of $59.1 billion, narrower than a revised deficit of $61.3 billion reported for July. Exports during the month contracted by $3.4 billion to $164.7 billion from $168.1 billion reported in the previous month, while imports were $223.9 billion, down $5.5 billion from $229.4 billion reported in July.

The Labor Department released a separate report showing a continued decrease in import and export prices in the month of September, with prices falling for the second consecutive month. The report showed that import prices fell 3.0 percent in September following a 2.6 percent decrease in August. The continued decrease was largely due to a steep drop in petroleum import prices, which fell by 9.0 percent.

The Labor Department added that export prices showed a 1.0 percent decline in September compared to a 1.7 percent decrease in the previous month. A 0.3 percent decrease in agricultural export prices contributed to the decrease in total export prices

Leaders of the G-7 countries are meeting over the weekend, followed by another meeting of G-20 countries to ease out the financial crisis that is looming large at present across the global markets. The outcome of the meetings and the strength of the key market moving economic data slated for release during the upcoming week will be watched with vivid interest by traders and analysts to get a hindsight of hope and optimism about the US economy.

Traders are likely to focus primarily on the Labor Department's consumer and producer price reports for September, the Commerce Department's retail sales report and the Federal Reserve's industrial production report.

Additionally, the results of the October manufacturing surveys of the New York Federal Reserve and the Philadelphia Fed, the housing starts report for September, the National Association of Homebuilders' housing market index and the University of Michigan's consumer sentiment survey may also be in the spotlight. Market participants could attach some significance to the regularly scheduled weekly oil inventory and jobless claims reports and the Commerce Department's business inventories report for August.

Producer prices are likely to have declined, although the core reading is expected to show growth. Falling food and energy prices could keep the headline inflation rate in check for the second straight month. Barclays believes that input cost pressures over the past year are likely to continue to make their way through the supply chain in the near future, suggesting that a more significant decline in core goods inflation is several months off.

Meanwhile, the consumer price inflation is likely to have remained tame due to the decline in energy prices. However, the core prices are likely to reflect the lagged effects of past increases in commodity and import prices. One can expect a cooling in the core inflation rate due to the fact that firms have been lowering prices in-line with the sagging demand.

Reflecting a broad based decline in the output of the manufacturing sector, industrial production for August is expected to show a drop. The assumption is based on the fact that the ISM's manufacturing index moved sharply into recession territory in the past month. Mining output may be hurt by hurricane-related disruption to refineries.

Housing starts are likely to have remained flat in September due to a drop in single-family starts. The drop in sales could leave builders contending with excess inventories. Therefore, it is unlikely that housing starts recover any time soon.

Monday

There are no major economic reports scheduled to be released on Monday.

Tuesday

Treasury Budget, a monthly account of the surplus or deficit of the federal government is scheduled to be released at 2 PM ET on Tuesday. Economists expect the budget for September to show a surplus of $62 billion.

Philadelphia Federal Reserve Bank President Charles Plosser is scheduled to speak at a Philadelphia Fed event at 12:30 PM ET on Tuesday. St. Louis Federal Reserve Bank President James Bullard is set to speak at the Economic Club of Memphis at 8.30 PM ET, while San Francisco Fed President Janet Yellen would speak on the economic outlook at 10 PM ET.

Wednesday

Boston Federal Reserve President Eric Rosengren is slated to speak on the economic outlook at 8:05 AM ET on Wednesday. Meanwhile, Federal Reserve Chairman Ben Bernanke is due to speak to the Economic Club of New York at 12:15 PM ET.

The U.S. Labor Department is scheduled to release a report on the producer price index for September at 8:30 AM ET on Wednesday. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index for September show a 0.3% decline and the core reading to show 0.2% growth.

The wholesale price inflation report for August showed that producer prices declined 0.9%, while the core producer price index increased 0.2%. Economists had expected the headline index to show a 0.5% decline and the core reading to show 0.2% growth.

Food prices rose 0.3%, the same pace as in the previous month. Energy prices declined 4.6%, reversing some of the 3.1% gain in the previous month. On a year-over-year basis, the producer price index rose an unadjusted 9.6%.

Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 AM ET on Wednesday. Economists estimate a 0.4%decline in the retail sales for September, while they estimate 0.1% growth in the retail sales, excluding autos.

Retail sales fell 0.3% in August compared to the previous month. The previous month's growth was downwardly revised to show a 0.3% decline. Economists had estimated 0.3% growth for August. Year-over-year, retail sales were up 1.6%. Sales, excluding autos, slipped 0.7%, reversing the 0.3% gain in the previous month. The decline was worse than the 0.2% drop predicted by economists. Sales at motor vehicle & part dealers rose 1.9% compared to the previous month, but they declined 13.5% from the year-ago period.

Sales at electronics & appliance stores and building material & garden equipment & supplies fell 1.3% in August compared to flat sales in the previous month. Sales at gasoline station sales fell 2.5% compared to 0.2% growth witnessed in the previous month.

The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 AM ET on Wednesday. The headline general business conditions index for October is expected to decline to -10.

The results of the September survey showed that the general business conditions index slipped 10 points to -7.4. Economists had expected the index to show a reading of -1.4.

The indexes of new orders and shipments rose modestly and were slightly above zero. Meanwhile, the employment indexes were negative. The prices paid, although still elevated, retreated modestly. The future general business conditions index remained close to last month's level.

The Commerce Department is scheduled to release its business inventories report for August at 10 AM ET on Wednesday. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.4% increase in business inventories for the month.

Business sales rose 0.5% in July from the previous month and climbed 8.8% from the year-ago period. At the same time, business inventories at the end of July was up 1.1% on a monthly basis. The total business inventories to sales ratio on a seasonally adjusted basis at the end of July was 1.24 compared to 1.26 in the year-ago period.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.

Crude oil stocks rose by 8.1 million barrels in the week ended October 3rd to 302.6 million barrels. Inventories of crude oil are now in the upper half of the average range for this time of the year.

Gasoline stockpiles rose by 7.2 million barrels, but remain below the lower boundary of the average range. On the other hand, distillate fuel inventories fell by 0.5 million barrels. Refinery capacity utilization over the four-weeks ended October 3rd averaged 74.3% compared to 73.7% in the previous week.

The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET on the same day. The report is normally released about two weeks before the monetary policy meeting is held.

Thursday

The consumer price index for September is scheduled to be released at 8:30 AM ET on Thursday. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The consensus estimates call for a 0.1% increase in the consumer price index and a 0.2% rise in the core consumer price index that excludes food and energy.

U.S. consumer prices declined 0.1% in August compared to a 0.8% increase in the previous month. Core consumer prices rose 0.2%, slightly slower than the 0.3% rate in July. The consensus estimates had called for a 0.1% decline in the headline consumer price index and a 0.2% rise in the core consumer price index that excludes food and energy.

Food prices rose 0.6% in August compared to a 0.9% increase in the previous month, while apparel prices climbed 0.5%, adding to the 1,2% gain in July. Transportation prices fell -1.5% in August compared to a 1.7% increase in July. Housing prices eased 0.1% compared to a 0.6% gain in the previous month.

The Labor Department is due to release its customary weekly jobless claims report for the week ended October 11th at 8:30 AM ET on Thursday.

The number of individuals claiming unemployment benefits fell to 478,000 in the week ended October 4th from the previous week's revised figure of 498,000. Economists had been expecting jobless claims to fall to 475,000 from the 497,000 originally reported for the previous week.

At the same time, the report showed that the less volatile four-week moving average rose to 482,500 from the previous week's revised average of 474,250. The report also showed an increase in continuing claims in the week ended September 27th, which rose to 3.659 million from the preceding week's revised level of 3.603 million. With the increase, continuing claims rose to their highest level since June of 2003.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for July at 9 AM ET on the same day.

The industrial production report of the Federal Reserve is due out at 9:15 AM ET on the same day. Economists estimate that industrial production declined 0.8% in August, while capacity utilization is expected to come in at 78%.

Industrial production for August declined 1.1% following an upwardly revised 0.2% gain in July. Economists had expected a 0.3% decline in industrial output for August. Manufacturing output fell 1% and mining output eased 0.4%, while the output of utilities declined 3.2%. The rate of capacity utilization edged down to 78.7% in August, and was 2.3 percentage points below its average for 1972-2007.

The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 AM ET on Thursday. Economists expect the diffusion index of current activity to show a reading of -5 for October compared to the previous month's 3.8.

In September, the index rose to 3.8 from -12.7 in August. Most sub-components also improved in the month. While the new orders index rose to 5.6 from -11.9, the shipments index rose to 2.6 from -3.3 for the previous month. The outlook in six months ahead also improved.

The National Association of Homebuilders' is scheduled to release the results of their survey on homebuilders' confidence on Thursday.

In September, the association's housing market index rose 2 points to 18, suggesting that the housing market may be nearing its bottom. All the three sub-indexes rose during the month.

Rosengren will speak on foreclosures at 8 PM ET on Thursday.

Friday

A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which is the number of permits issued for new housing units each month, is slated to be released at 8:30 AM ET on Friday. Economists estimate housing starts of 880,000 and building permits of 845,000 for September.

Housing starts fell 6.2% in August to a seasonally adjusted annual rate of 895,000 from a revised rate of 954,000 for July. Economists had estimated housing starts to come in at an annual rate of 905,000 units.

On a year-over-year basis, housing starts declined 33.1%. Building permits, a leading indicator to housing starts, fell at a monthly rate of 8.9% and were down at a year-over-year rate of 36.4% to 854,000.

The University of Michigan's preliminary report on consumer sentiment index for October is scheduled to be released at 10 AM ET on the same day. Consumer confidence is expected to tick down in the month, with economists forecasting a modest rise in the index to 69 in October from 70.3 in the previous month.

Bullard is scheduled to speak on economic policy at 12:45 PM ET, while Chicago Federal Reserve President Charles Evans is due to speak on the economic outlook at 2 PM ET.

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