bank run blog

Analysts from Chapman University in California say the US economy is in a recession that is predicted to last into next year. Economists at Chapman said that they expect consumer spending to decline by more than $100 billion over the course of 2008, which translates to a drop of at least a single percentage point in real growth in the US.

The researchers said that the economic outlook for the state of California looked even bleaker than the outlook for the rest of the country, predicting that, though property values may have begun to level out after losing more than 40 percent of their value in some California markets, it could take up to two years to for the market to rebound. The Los Angeles Times said, “Forecasters believe this prolonged slump will further slow construction and tighten lending for commercial and residential building adding more weight to an already sluggish economy.” Esmael Adibi , of Chapman University, said;

“Before it was just financial, but now in the Inland Empire they are losing jobs, they are in a recession. Mortgage and construction are losing jobs, no question. From there it’s a trickle-down effect. When you don’t build homes, appliance stores and furniture stores start softening. Housing is not an isolated sector.”

In Los Angeles, the sale price for homes fell in April by over 23 percent over the previous year, in San Francisco and San Diego, home prices fell by more than22 percent. Nationwide, home prices fell by an average of 16 percent over a two period.

see articles-
Los Angeles Times : Chapman University forecasters say U.S. is in recession
Inland Valley Daily Bulletin : Recession called real

The trade deficit has swollen to its highest level in over a year with the gap between exports and imports rising by over seven and one half percent in April to $60.9 billion. The imbalance is the largest reported by the Commerce Department since March 2007. The increase was largely blamed on historically high oil prices. Yahoo News reported;

“The higher deficit was driven by a $4.3 billion increase in crude oil imports, which jumped to a record $29.3 billion in April, as the average per-barrel price rose to an all-time high of $96.81. If the price of crude had instead been at $60 per barrel, about where it was a year ago, the trade deficit would have been $11 billion lower in April. Analysts cautioned the deficit will widen further in coming months, given that oil is now trading above $130 per barrel.”

The Commerce Department also reported that deficit with China increased, up by 25.9 percent in April to $20.2 billion, the highest level in three months.

Economists actually predict that the trade deficit should shrink over time because of the underlying weak fundamentals of the US economy, identified by Yahoo News as a “significant economic slowdown in the United States which is cutting into demand for imports and the weak dollar, which has helped to boost U.S. exports.” Bloomberg writes, “The dollar’s two-year slide, coupled with stronger growth in Europe and Asia, is spurring demand for” cheap American products.

Federal Reserve Chairman Ben S. Bernanke pulled a positive out of the feedback loop created by the weak dollar and Americans being unable to tap credit lines to buy more stuff when he said last week, “Currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit.”

The dollar was down 9.6 percent against a trade-weighted basket of currencies from major trading partners in the 12 months that ended in April.

see stories-
Yahoo News :Trade deficit jumps to highest level in 13 months
Bloomberg : U.S. Trade Gap Widened in April on Record Oil Imports

Even with limited options available to them to halt the “disorderly unwinding” that they have been so determined to avoid, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke have apparently decided that public statements suggesting future action will be enough to influence world markets. CNBC is reporting :

“The U.S. Federal Reserve is hoping tough talk on inflation will do the job of moderating recent price increases, giving it room to avoid raising interest rates as the economy remains fragile.

The problem is that investors may try to determine whether the central bank is bluffing.

A failure to deliver on its implicit promise of tighter monetary policy could lead to increased financial market volatility and derail the tentative calm that aggressive Fed action has managed to inspire.

Futures markets have already begun pricing in chances of an interest rate hike as early as September, a prospect that many analysts think is far-fetched given the still-shaky state of housing and finance.”

In what appears to be a concerted effort, other prominent Fed members made similar statements in speeches around the country, according to Reuters :

“Top Federal Reserve officials on Tuesday hammered home the U.S. central bank’s determination not to allow inflation to get out of control, cementing views that interest rates will rise later this year.

The remarks by two regional Fed presidents followed hard-line comments on Monday from Fed Chairman Ben Bernanke that the U.S. central bank would “strongly resist” any deterioration in inflation expectations. Analysts and markets viewed the comments as a sign the Fed — like other central banks — was turning its sights on inflation.”

The Los Angeles Times is reporting that the campaign was effective in the short term :

“The Bush administration and the Federal Reserve are getting what they wanted: a big rally in the dollar and a drop in oil prices.”

The article describes an indirect attempt to stem the flow of institutional dollars to the commodities markets :

“Here’s the widespread view on Wall Street: The administration and the Fed looked around for a way to help pull oil back down, and they decided to focus on the dollar. If they can boost the greenback’s value they might reduce global investors’ and speculators’ appetite for commodities, which have been rallying in part because a weak dollar makes commodities look more appealing than other dollar-denominated assets.”

CNBC : Fed Is Hoping to Talk Down Inflation, Not Boost Rates

Reuters : Fed hammers home message against inflation

Los Angeles Times : Dollar jumps and oil sinks; bond market pays the price

Late on Sunday, The Associated Press began to leak signals from senior Bush administration officials that direct intervention to prop up the US dollar was under consideration at the Treasury :

“Bush and Treasury Secretary Henry Paulson appear to be easing away from their hands-off approach to managing the value of the dollar. While a strong dollar has long been stated U.S. policy, that usually has amounted to no more than rhetoric unbacked by specific steps.

The government has limited options for propping up the greenback, especially in an election year with rising unemployment, slumping consumer confidence and the worst housing market in decades.

Paulson declined to rule out direct intervention — the buying by the government of dollars in currency markets — as a way to influence the currency’s value. Another way to shore up the dollar is for the Federal Reserve to raise interest rates — seen as an unlikely prospect given the current state of the economy.

For seven years, the administration has refused to intervene in currency markets, even though the dollar has been sliding in value for most of the time Bush has been in office. The administration has insisted that currency levels should be set by free-market forces.”

The public relations campaign continued on Monday and Tuesday, with Paulson making the rounds, telling reporters that he “stood by” his remarks, according to Reuters :

“He repeated that the long-term fundamentals of the U.S. economy were strong, compared favorably to other major industrial economies and would show through to the dollar’s value. ‘I believe that those long-term fundamentals will be reflected in our currency value.’

Paulson said that was the same message that he would deliver to other finance ministers from the Group of Eight nations meeting in Osaka this coming weekend, although he declined to comment directly on whether the dollar’s weakness and potential intervention would be a subject of discussion.”

Associated Press : Administration does not rule out currency intervention

Reuters : Paulson says stands by intervention comment

International Herald Tribune : Euro down against dollar on US officials’ remarks, despite spike in US trade deficit

After apparently stabilizing on reports of diminished consumption and adequate supplies, oil and oil futures rocketed up this morning, pounding US stocks and sending the normally conservative Friday traders into a panicky sell-off. According to Bloomberg News :

“Crude oil surged more than $10 a barrel to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.”

Some market analysts see oil going up even more sharply in the near term. CNN Money is reporting :

“The argument echoes that made by Goldman Sachs analyst Argun Murti, who has said it is increasingly likely oil prices could spike as high as $200 before enough demand is knocked out to rebalance the market.

U.S. lawmakers and regulators, unconvinced supply and demand fundamentals fully explain the oil price spike, are looking into oil markets for signs of manipulation and undue influence from speculators.”

Bloomberg : Oil Rises to Record on Weakening Dollar, Morgan Stanley Outlook

CNN Money : Morgan Stanley Analyst Sees Oil Driven To $150 By July 4