Sandra Hines of the Moratorium Now Coalition holds posters outside the Bank of America during a demonstration on July 22, 2008. (Photo: Alan Pollock).
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More Arrows Seen Pointing to a Recession
By PETER S. GOODMAN
New York Times
The American economy expanded more slowly than expected from April to June, the government reported Thursday, while numbers for the last three months of 2007 were revised downward to show a contraction — the first official slide backward since the last recession in 2001.
Economists construed the tepid growth in the second quarter, combined with a surge in claims for unemployment benefits, as a clear indication that the economy remains mired in the weeds of a downturn. Many said the data increased the likelihood that a recession began late last year.
The next major piece of data comes Friday, when the government is to release its monthly snapshot of the job market. Analysts expect the report to show a loss of 75,000 jobs, signifying the seventh straight month of declines.
“We already knew the economy was weak, and now you have both a negative growth number coupled with job losses,” said Dean Baker, a director of the liberal Center for Economic and Policy Research. “There’s a lot of real bad times to come.”
President Bush zeroed in on the positive growth in the second quarter — a 1.9 percent annual rate of expansion, compared with an anticipated 2.3 percent rate. That follows growth of 0.9 percent in the first quarter. He claimed success for the $100 billion in tax rebates sent out by the government this year in a bid to spur spending, along with $52 billion in tax cuts for businesses.
“We got some positive news today,” the president said in West Virginia, addressing a coal industry trade association. “It’s not as good as we’d like it to be but I want to remind you a few months ago, there were predictions, and — that the economy would shrink this quarter, not grow.”
But the snapshot of disappointing economic growth released by the Bureau of Economic Analysis on Thursday morning provided no comfort to Wall Street, where a broad sell-off commenced. By the end of business, the Dow Jones industrial average was down 206 points to close at 11,378, a drop of nearly 2 percent.
The rout may have been explained in part by significant changes the government made to historical data on the profitability of American businesses. According to the revised numbers, corporate profits earned in the United States by American companies rose much more swiftly than previously recorded from 2005 through 2007, making the recent decline appear much steeper.
That the economy grew at all this spring is a testament to two bright spots — increased consumer spending fueled by the tax rebates, and the continuing expansion of American exports.
Consumer spending, which amounts to 70 percent of the economy, grew at a 1.5 percent annual rate between April and June, after growing at a meager 0.9 percent clip in the previous quarter.
“Clearly the tax rebates did give some oomph to the economy,” said Robert Barbera, chief economist at the research and trading firm ITG.
Exports expanded at a 9.2 percent annual pace in the second quarter, up from 5.1 percent in the first three months of the year. Foreign sales have been lubricated by the weak dollar, which makes American-made goods cheaper on world markets.
Adding to the improving trade picture, imports dropped by 6.6 percent, as Americans tightened their spending. Imports are subtracted from economic growth, so the effect was positive.
Over all, trade added 2.42 percentage points to the growth rate from April to June. Without that contribution, the economy would have contracted.
But many economists are dubious that consumer spending and exports can keep growing robustly in the face of substantial challenges that are now entrenched in the United States and are gathering force in many other major economies. Japan and much of Europe appear headed into downturns, damping demand for American-made products.
“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist at Goldman Sachs in New York. “In an environment where the global economy is clearly slowing, you’re not being able to get that export growth in future quarters.”
Economists said the sharp drop in imports was largely a function of retailers delaying wholesale purchases in the midst of acute fears about declining American spending power — a dynamic that will eventually give way to new spending.
“This reflects sheer panic by retailers about what the next Christmas buying season is going to look like,” said Mark Zandi, chief economist at Moody’s Economy.com.
The tax rebates have mostly been distributed. While the checks appear to have bolstered spending, they have failed to generate activity that is likely to carry on even after the cash has cycled through the economy, say economists.
“They slowed the downturn, but it’s clear they didn’t really provide any spark,” Mr. Baker said.
Employers have not hired much, even as shopping has picked up, cognizant that the rebate checks are a one-time event. Businesses have not shelled out for new machinery. Indeed, investment for equipment fell 3.4 percent in the spring months, dropping for the second consecutive quarter.
Rather than stockpile more goods, businesses generally tried to sell what they already had on hand. Business inventories declined in the second quarter by $62 billion, a factor that shaved nearly 2 percent off the overall rate of economic growth.
As the impact of the rebate checks continues to wear off in the coming weeks, households will be left confronting the same set of troubles that have been dragging on the economy for many months: a deteriorating job market, rising prices for food and gas and plummeting housing values.
Tens of millions of Americans have in recent years borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations and new cars. As housing values continue to fall, that artery of finance is rapidly constricting.
Since last summer, when the mortgage crisis provoked panic on Wall Street and many Americans saw access to credit diminish, consumer spending on so-called durable goods like appliances, cars and furniture has been sliding. This spending barely grew in the last three months of 2007, fell at a 4.3 percent clip in the first three months of this year and dropped at a 3 percent pace in the second quarter.
Meanwhile, joblessness is growing, with new unemployment claims filed in the week that ended July 26 swelling to 448,000 — up 44,000 from the previous week. And the purchasing power of wages is being eroded by higher prices for food and energy. Prices paid for goods by Americans surged at a 4.2 percent annual rate in the second quarter, after climbing at a 3.5 percent annual clip over the first three months of the year, according to the report on Thursday.
Higher prices, fewer paychecks and less household wealth: It is not a recipe for free-spending abandon.
“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore. “Spending growth is slowing and income growth is slowing.”
Democrats in Congress have begun devising a second package of measures to stimulate the economy, centered on aid to struggling states. But the Bush administration has resisted such proposals, and the political stakes of a presidential election year make compromise especially tricky.
The Federal Reserve has lowered interest rates in recent months to encourage businesses to invest and households to spend. But with concern growing about high prices — a trend fueled by lower interest rates — the Fed may not be able to deliver another round, even if growth slows further.
“Looking forward, I don’t think there’s anything to change the lousy trend for the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a research firm.
With the last three months of 2007 now officially revised down — from an initial 0.6 percent annual rate of growth to a 0.2 percent decline — many economists expect that these tough times will officially be declared a recession. That label is affixed by a panel of economists at a private research institution, the National Bureau of Economic Research, though typically well after the fact.
President Bush derided such characterizations, along with the academic discipline known as the dismal science.
“You can listen to these economists,” Mr. Bush said in West Virginia. “On the one hand, they’ll say, and then on the other hand. If they had three hands, it would be on the one hand, the second hand and the third hand.”
But for many, the old debate about whether this is a recession has become purely academic, and eclipsed by the troubles at hand.
“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG economist. “They have the luxury of not having Ph.D.’s. The auto companies are in dire straits, the airlines have been shutting down flights and firing pilots. The truckers are in near hysteria because of the price of diesel. If you round up the usual suspects, this is a bad circumstance. And the word we usually use for a bad circumstance is a recession.”
Michael M. Grynbaum and Floyd Norris contributed reporting.
August 2, 2008
G.M. Loses $15.5 Billion in Quarter
By BILL VLASIC
The General Motors Corporation, reeling from the abrupt shift to small cars by consumers, posted a $15.5 billion second-quarter loss on Friday, in results weighed down by restructuring charges and write-downs.
According to the earnings statement, the loss included $9.1 billion in one-time charges, $3.3 billion of which was for employee buyouts.
The second-quarter loss was $27.33 a share, compared with net profit of $891 million, or $1.56 a share for the same period a year ago. Revenues were $38.2 billion, down $8.5 billion, from $46.7 billion in the quarter a year ago.
Excluding one-time charges, G.M. had a loss of $6.3 billion or $11.21 a share, compared with income of $1.3 billion or $2.29 a share in the same period last year.
Included in the results, the statement said, was $1.3 billion in write-offs that reflect the drop in value of trucks and sport utility vehicles in GMAC Financial Services’ portfolio.
G.M., like its Detroit rivals Ford Motor Company and Chrysler, was surprised in the spring by the surprising shift to smaller, more fuel-efficient cars.
As gas prices rose above $4 a gallon, sales of G.M.’s large pickups and sport utility vehicles declined sharply in a market that was already trending downward.
The company’s inventories of unsold trucks forced it to dramatically scale back production.
In June, G.M.’s chairman, Rick Wagoner, said the company would close four assembly plants making pickups and S.U.V.’s by 2010 and slash 500,000 units of vehicle production.
And in a move that symbolized the end of the S.U.V. era, Mr. Wagoner said that G.M. had begun a “strategic review” toward a likely sale of its Hummer brand.
Besides cutting truck and S.U.V. production, G.M. also announced plans to add third shifts at two plants to increase the output of smaller cars.
The automaker stepped up its downsizing efforts in the United States by offering another round of buyout and early retirement programs to its hourly workers. About 19,000 workers — or a quarter of its unionized workforce — accepted the offers and agreed to leave the company.
But even as G.M. kept cutting, speculation grew among investors this summer that the automaker was running dangerously short on cash reserves.
Analysts estimated that G.M. was burning through $1 billion in cash a month, and needed more liquidity to survive the sales downturn into 2009.
With G.M.’s stock dropping to $10 a share and analysts suggesting G.M. might file for bankruptcy protection, the company announced another round of cost cuts in mid-July.
G.M. said it would bolster its liquidity by $15 billion through a combination of cutbacks, asset sales, and debt offerings.
On July 15, Mr. Wagoner outlined a plan that included a 20-percent reduction in salaried personnel costs, the elimination of health-care coverage for white-collar retirees past the age of 65, and cuts in advertising and marketing budgets and capital expenditures.
August 1, 2008
Profit Data May Explain U.S. Gloom
By FLOYD NORRIS
Corporate profits earned in the United States rose much more rapidly from 2005 through 2007 than had been earlier reported, making the subsequent fall seem even more precipitous, government figures showed Thursday.
The revised figures may help to explain the sense of pessimism that has been reported in surveys of consumers and business executives, said Robert Barbera, the chief economist of ITG, an economic research company. Pointing to the previous profit figures, some commentators had suggested there was more gloom than the economic data seemed to justify.
First-quarter profits earned in the United States by American companies have fallen 18 percent from their peak, the revised figures show, rather than the 11 percent previously reported.
That decline has been partly offset by soaring overseas profits for American companies. On Thursday, the government raised its estimate of those profits in the first quarter, even as it reduced its estimate of profits earned in this country.
By the latest measure, first-quarter overseas profits were the highest they have ever been for American companies — up 25 percent from the third quarter of 2006, when domestic profits peaked.
Overseas profits, while important to shareholders, do not reflect the performance of the American economy or the prospects for employment in this country. Surveys show that both business executives and consumers expect declines in jobs in America in coming months.
The figures show that more than a third of profits earned by American companies are now made overseas. In the first three months of this year, the proportion was 35 percent, nearly twice what it was a decade ago.
The revised data shows that profits of American companies are down 7 percent over all, rather than the 2 percent previously reported.
The revised figures were contained in the revisions of the gross domestic product numbers issued Thursday by the Bureau of Economic Analysis, a part of the Commerce Department.
Brent R. Moulton, the bureau’s associate director for national economic accounts, said the new figures reflected preliminary data from the Internal Revenue Service for 2006, and revised figures for 2005. For 2007 and 2008, the changes reflect assorted revisions in estimates of the performance of various industries.
Because the figures are largely based on tax returns, the eventual totals are used as clear indicators of overall economic performance of American businesses, both privately owned companies and those owned by shareholders.
The revised figures indicate that in the third quarter of 2006, when domestic profits of American companies peaked, the annual rate of profits was $1.27 trillion, $100 billion more than had previously been estimated. That figure fell to $1.04 trillion in the first quarter of this year, the lowest rate since the third quarter of 2005.
By contrast, the overseas profits of American companies came in at an annual rate of $557 billion in the first quarter of 2008, an increase of more than $100 billion from the 2006 quarter.
The profit figures in the government report represent operating profits, not changes in the value of assets. That policy means that the profit figures for financial industries estimated by the government are now far higher than the ones being reported to shareholders. Mr. Moulton said that write-downs of the value of securities, or write-offs of bad loans— which have cost banks tens of billions of dollars — are not included.
Were they included, it seems certain that the decline in profits earned in the United States by American companies would be even larger than was indicated by the figures released Thursday.
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