More Signs of Economic Weakness

September 25, 2008

Data released today underscored the global fallout from what began as a U.S. sub-prime mortgage debt problem.  All continents are feeling the pain.  In Australia, new home sales fell 1.3% in August, including a 2.4% drop in detached private homes, and by 8.4% between June and August.  Japanese export growth imploded to a 12-month gain of 0.3% in August from 8.1% year/year in July.  Exports to the United States and EU sank by 21.8% and 3.5%.  Oil imports soared 64.3%, but all other imports went up a shade less than 7%.  The trade balance was in deficit, something that had not occurred in a month other than January since 1982, and the bilateral surplus in trade with the United States was 48% lower than in August 2007.  Hong Kong experienced a run on a bank, triggered by a false rumor, for the first time since the Asian crisis ten years ago.

In Europe, Irish GDP data confirmed successive quarters of negative growth, -0.3% in 1Q followed by -0.5% non annualized in 2Q and a drop of 0.8% from 2Q07.  Dutch business sentiment fell to -0.5 in September from +4.9 in August and +7.5 in September 2007, posting the largest month-to-month deterioration in at least 23 years.  Mortgage lending rose 4.1% in the year to August, down from a rise of 8.1% in the previous twelve months, and M1 edged up only 0.2% in the latest statement year, down from 6.8% in the year to August 2007.  The acceleration of new jobless claims virtually assures that the United States is in recession.  This measure of layoffs reached 493K last week, and the four-week average of new jobless claims, a much better indicator of trend in this volatile data series, rose to 462.5K from 441K in the prior four weeks, 393K in the four weeks to July 26th, and 368K in the four weeks to May 31st.  That’s a jump of 94K or 25.5% in the space of just four months.

Many experts are unhappy with the bad asset bailout plan offered by the Bush administration, but it seems inconceivable that a variation of it will not be approved very soon.  This will be a huge and comprehensive undertaking.  The rescue package of November 1, 1978 to halt dollar deprecation and contain runaway domestic inflation, while addressing a totally different kind of threat, was also surrounded by extreme gravity and broad-ranging in its intent.  The centerpiece of that earlier plan was a then-unprecedented full percentage point increase in the Fed’s benchmark interest rates.  That element of the plan, more than Carter bonds and various other measures to build an intervention war chest, is how U.S. officials conveyed the seriousness of the problem and of their intent to address it.  A bad asset buyout plan, however large, would have a smaller impact on investor psychology if it is not accompanied by an inter-meeting reduction in the Fed’s interest rates.  Officials understand this, and that is why I am quite confident a U.S. rate cut is coming soon.  Rumors that such a move might be part of a coordinated reduction in key interest rates by several other central banks holds merit and should not be dismissed as just other fanciful wish.  As noted above, the fallout from the banking crisis is spreading outward rapidly to all parts of the earth.

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One Response to “More Signs of Economic Weakness”

  1. […] rates are the ones most likely to be cut.  My thinking there is explained in a posting from yesterday.  Comments by ECB officials including some today have revealed no hint of an imminent rate cut, […]

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