MCAD Industry View - A DECEMBER 2008 Update

The US economy actually shrank in Q3 2008 even more than previously believed, and consumers reduced their spending by the largest amount in 28 years. During the same period, home prices fell to levels not seen since early 2004. The updated reading on the US economy's performance from the Commerce Department showed the gross domestic product shrank at a 0.5% annual rate in the July-September quarter, weaker than the 0.3% rate of decline first estimated, and it marked the worst showing since the economy contracted at a 1.4% pace in the third quarter of 2001, when the nation was suffering through Bush 43's first recession. Even in Q2 2008, the economy was already struggling, growing at a measly 2.8%.

Meanwhile, the FDIC said the list of banks it considers to now be in trouble shot up nearly 50% to 171 during Q3 2008. The FDIC also said that US commercial banks and savings institutions suffered a 94% drop in third-quarter profits to $1.7 billion. Except for the fourth quarter of 2007, it was the lowest profit since the fourth quarter of 1990. On average, about 13% of “troubled banks” end up failing. Nine banks failed in the third quarter, reducing the FDIC's deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter. Twenty-two banks have failed so far this year compared with three for all of 2007, and more failures are expected.

The New York-based Conference Board said its Consumer Confidence Index fell to 38.8 in October 2008, the lowest since the research group started tracking the index in 1967, and Americans' views on the economy remain the gloomiest in decades as they grapple with massive layoffs, slumping home prices and dwindling retirement funds. American consumers slashed spending in the third quarter at a 3.7% pace, the biggest reduction in 28 years. Americans' disposable income fell at an annual rate of 9.2% in the third quarter, the largest quarterly drop on record dating back to 1947.

Home builders slashed spending at a 17.6% pace in Q3 2008, marking the 11th straight quarterly cut and fresh evidence of the depth of the US housing slump.

The AP reported on December 1, 2008, "A gauge of US manufacturing activity that fell to a 26-year low today followed similarly weak readings in Europe and China, fueling fears of a deepening global downturn. The Institute for Supply Management's (ISM) index of manufacturing activity for November (2008) fell to 36.2 from October's 38.9." Economists said that, "the manufacturing survey showed that the US economy is in a steep recession and that tough times will continue for manufacturers.”

Simultaneously, the “news” also emerged on December 1, 2008 from the National Bureau of Economic Research, (despite repeated denials throughout 2008 from Bush 43) that the United States economy officially sank into a recession last December (2007), which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation's business cycles. Private forecasters warned that this downturn was likely to set a new postwar record for length and likely to be more painful than any recession since 1981.

On cue, the Dow Jones industrial average promptly plunged nearly 680 points, or 7.7%, closing at 8,149 on December 1, 2008.

Despite their recent ineffectiveness, the Federal Reserve is expected to lower interest rates still again when its meets on December 16, 2008, its last session of the year. Last month, the Fed dropped its key rate to 1%, a level seen only once before in the last half-century (in 2003!). MOREOVER, LOW INTEREST RATES ARE DEVASTATING TO THOSE WHO WERE FRUGAL FOR 30 OR 40 YEARS AND STRUGGLED TO BUILD UP A FIXED-INCOME NEST EGG.

So far, though, these cuts and other Bush administration's financial bailout packages and radical actions seem unable to break though a dangerous credit clog, restore stability to financial markets and help the sinking US economy.

The US federal government just committed an additional $800 billion to two new loan programs on November 25, 2008 alone, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion. (That sum represents 60% of the nation's entire estimated gross domestic product!).

Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it's impossible to predict how much they will help now or how much they will eventually cost hapless US taxpayers. The final cost won't be known for many years. The alleged curbs on executive pay and golden parachutes for entities receiving bailouts are also not being enforced. The money has been committed to a wide array of programs, including loans and loan guarantees, asset purchases, equity investments in financial companies, tax breaks for banks, grudging help for struggling homeowners and a currency stabilization fund. Oh yeah, Citibank still gets billions in bailout money to use part of the money ($400 million) for naming the new NY Mets' baseball stadium.

Note also that most of the trillions in rescue money, about $5.5 trillion, comes from the Federal Reserve, which as an independent entity does not need congressional approval to lend money to banks or, in "unusual and exigent circumstances," to other financial institutions.

Of course, at press time for this issue of the MCAD INDUSTRY COMMENTARY, the failing Big 3 US auto companies, wherein the cores of American manufacturing expertise and security are at stake, along with 3 million US jobs, are as yet deemed somehow less worthy than Wall Street and banks to deserve financial loans from Washington!

Fighting for survival, Detroit's automakers appealed to Congress with a new case for a bailout on December 2, 2008, pledging to slash workers, car lines and executive pay in return for a federal lifeline. GM said it wouldn't last till New Year's without an immediate $4 billion and could drag the entire industry down if it fails.

General Motors asked for as much as $18 billion to keep afloat and survive even worse economic storms. “There isn't a Plan B,” said COO Fritz Henderson. “Absent support, frankly, the company just can't fund its operations.” Without help, he warned, “the company will default in the near term, very likely precipitating a total collapse of the domestic industry and its extensive supply chain, with a ripple effect that will have severe, long-term consequences to the U.S. economy.”

Ford said its November US light vehicle sales tumbled 31%, while even sales at Toyota fell 34% in November.

By the way…don't blame the unions! The last auto contract included so many painful givebacks that the gap in labor costs between the Big 3 US auto companies and the “foreign transplants” like Toyota and others, will be largely eliminated by the end of the contract.

The US auto companies are resisting calls that they file for bankruptcy, arguing that no one would buy a car from an automaker that might not survive the life of the vehicle. We agree.

This November - January lame duck period is hard to stomach. One supposes the lame-duck-in-chief is too busy adding to his list of 171 pardons and eight criminal sentence commutations so far, issuing midnight regulations to further weaken national environmental rules, and saving selected turkeys from the holiday dining table.

Too bad President-elect Obama has to wait till January 20, 2009 to take office!

By the way

While the above “tells” over the last 11 months were very visible, the burgeoning problems occurring over the previous seven years were also there for all those willing to notice, foretelling the ultimate disaster we're experiencing now. These latter crises date back to the 2001-2007 years and include but are not limited to the following enervating economic and/or geopolitical issues, many of which have been mentioned here in previous quarterly publications of the MCAD Industry Commentary:

(1) unremitting government extravagance and unwarranted tax cuts in the face of the shift from US federal budget surplus to deep deficit; (2) the definite long-term trend of a rich-get-richer, poor-get-poorer US income distribution; (3) sluggish net job growth chronically below the requirements of US population increases; (4) a net US disadvantage in globalization; (5) weakened US environmental stewardship and deteriorating US infrastructure; (6) the ballooning real and psychic costs of recent and current wars, in lives and treasure, including the 5-year-old IRAQ quagmire and resurgence of the Taliban in Afghanistan; (7) reduced worldwide and domestic admiration for US leadership, with an astonishing lack of accountability, conflating IRAQ with 9/11, and appalling ignorance of history in understanding or even talking to foreign countries (Syria, Palestine, Iran, North Korea, et al); (8) the weaker US dollar; (9) serially elevated energy, oil & gas prices, with record profits for “big oil”; (10) a still-deteriorated domestic tech-laden NASDAQ market vs. 2001; (11) ongoing corporate fraud, including but not limited to widespread options back-dating; (12) scandals, indictments, criminal investigations and even some guilty pleas in the White House and Congress; (13) double-digit annual rises in the cost of US health care and ongoing increases in the number of US medical & dental uninsured; (14) stunning US federal incompetence (revolving-door cronyism, inept disaster relief, the bumbled Medicare drug plan, mishandled offshore oil leases, ignoring global warming, homeland security lapses, incompetent nation building, Osama still on the loose, condoning or ordering extraordinary foreign rendition, Abu Ghraib, Haditha, Guantanamo, water-boarding, etc.); (15) illegalities in reduced US civil liberties & personal privacy; (16) unrelenting illegal immigration into the US, with no reform in sight; (17) the rise of religious fundamentalism in the US, resulting in the blurring of constitutional separation between church and state; (18) deterioration of the US K-12 education system, especially in math & science, and ominous reductions in college affordability by low & medium income US citizens; all resulting in abridged future global US competitiveness; (19) rapidly falling US home prices during 2005-2008, and coming soon, the same fate for commercial property; (20) the rise of secretive, unregulated hedge fund investment partnerships and sub-prime mortgages, derivatives and credit default swaps that create widespread financial disruptions; and (21) unceasing record-high US trade deficits, requiring the US to borrow billions of dollars every week from abroad, just to name a few.

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