bank run blog

The “downside risks”, as Ben Bernanke likes to call them, of presiding over an economy in which consumer spending must remain constant for whole sectors to remain solvent, are becoming clearer with each release of fresh data. According to the Associated Press :

“Consumers reduced their spending at retail stores again in November while the costs of goods before they reach store shelves also continued to drop, more bad signs in a recession that appears to be deepening.

Businesses also cut their inventories by the largest amount in five years, the government said Friday, a sign the recession will force further cuts in production.”

As retailers desperately cut costs they discover that they still can’t spur spending activity. Expect a major wave of bankruptcies in the first quarter of 2009.

“Meanwhile, the Commerce Department reported Friday that retail sales dropped by 1.8 percent in November. The decline, which was slightly below the 1.9 percent dip that had been expected, was the fifth straight monthly drop, a record stretch of weakness.

The downturn was led by a 2.8 percent fall in auto sales, which had been expected since automakers had reported that November was their worst sales month in more than 26 years.

The Producer Price Index, which tracks costs of goods before they reach consumers, fell 2.2 percent last month as gasoline and other energy prices retreated, according to the Labor Department. That followed a record 2.8 percent plunge in wholesale prices in October, and November’s price drop was larger than the 2 percent decline economists expected.”

full story

Consumers are absorbing so much negative news that it is not surprising that a major pullback in discretionary spending would occur. The data behind the data is reported by Bloomberg :

“U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter’s drop.

Combined with the loss of 1.9 million jobs so far this year, almost half of which occurred in the last two months, and the slump in bank financing since the credit crisis intensified, the figures darken an already gloomy outlook for consumer spending. President-elect Barack Obama has called for a stimulus package of unprecedented size as the economy slides toward the longest postwar recession.”

full story

At the institutional level, deflationary fears are driving unprecedented movements in the bond markets. An article in Time Magazine, headlined Stocks Say Recession, but Bonds Say Depression, surveys the action :

“Extraordinary things are happening in bondland lately. Tuesday’s head-spinning news that Treasury bills had been auctioned off with negative interest rates is only the latest in a series of astonishing developments, surpassing even the more widely followed stock-market swings.

While the Treasury auction grabbed headlines, corporate bonds are doing equally amazing things: the average yield on lower-quality investment-grade corporate bonds — triple-B rated — is hovering around 10%, an unusually rich 7.5-percentage-point spread over Treasury bonds of similar maturity. (That spread has tripled over the past year.)”

full story