By TOM RAUM and DANIEL WAGNER, Associated Press Writers Tom Raum And Daniel Wagner, Associated Press Writers Mon Mar 2, 3:28 pm ET
WASHINGTON – A Depression doesn't have to be Great — bread lines, rampant unemployment, a wipeout in the stock market. The economy can sink into a milder depression, the kind spelled with a lowercase "d."
And it may be happening now.
The trouble is, unlike recessions, which are easy to define, there are no firm rules for what makes a depression. Everyone at least seems to agree there hasn't been one since the epic hardship of the 1930s.
But with each new hard-times headline, most recently an alarming economic contraction of 6.2 percent in the fourth quarter, it seems more likely that the next depression is on its way.
"We're probably in a depression now. But it's not going to be acknowledged until years go by. Because you have to see it behind you," said Peter Morici, a business professor at the University of Maryland.
No one disputes that the current economic downturn qualifies as a recession. Recessions have two handy definitions, both in effect now — two straight quarters of economic contraction, or when the National Bureau of Economic Research makes the call.
Declaring a depression is much trickier.
By one definition, it's a downturn of three years or more with a 10 percent drop in economic output and unemployment above 10 percent. The current downturn doesn't qualify yet: 15 months old, that 6.2 percent drop in output and 7.6 percent unemployment.
Another definition says a depression is a sustained recession during which the populace has to dispose of tangible assets to pay for everyday living. For some families, that's happening now.
Morici says a depression is a recession that "does not self-correct" because of fundamental structural problems in the economy, such as broken banks or a huge trade deficit.
Or maybe a depression is whatever corporate America says it is. Tony James, president of private equity firm Blackstone, called this downturn a depression during an earnings conference call last week.
The Great Depression retains the heavyweight crown. Unemployment peaked at more than 25 percent. From 1929 to 1933, the economy shrank 27 percent. The stock market lost 90 percent of its value from boom to bust.
And while last year in the stock market was the worst since 1931, the Dow Jones industrials would have to fall about 5,000 more points to approach what happened in the Depression.
Few economists expect this downturn will be the sequel. But nobody knows for sure, and nobody can say when or whether the downturn may deepen from a recession to a depression.
In his prime-time address to Congress last week, President Barack Obama acknowledged "difficult and trying times" but sought to rally the nation with an upbeat vow that "we will rebuild, we will recover."
The next day, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the "recession is serious, financial conditions remain difficult." He held out a best-case hope that it might end later this year, with "full recovery" in two to three years.
Despite the tempered optimism, the economic outlook remains grim. Consumer confidence has fallen off the table, stocks are at 12-year lows, layoffs come by the tens of thousands, and credit remains tight.
The current downturn has many of the 1930s characteristics, including being primed by big stock market and real estate booms that turned to busts, said Allen Sinai, founder of Boston-area consulting firm Decision Economics.
Policymakers and economists note there are safeguards in place that weren't there in the 1930s: deposit insurance, unemployment insurance and an ability by the government to hurl trillions of dollars at the problem, even if it means printing money.
Before the 1930s, any serious economic downturn was called a depression. The term "recession" didn't come into common use until "depression" became burdened by memories of the 1930s, said Robert McElvaine, a history professor at Millsaps College in Jackson, Miss.
"When the economy collapsed again in 1937, they didn't want to call that a new depression, and that's when recession was first used," he said. "People also use 'downward blip.' Alan Greenspan once called it a 'sideways waffle.'"
Most postwar U.S. recessions have come after the Fed has increased interest rates to cool down rapid economic growth and inflation. Later, the Fed lowers rates and helps restart the economy, with the housing and auto sectors — both sensitive to interest rates — leading the way.
This time is different: As Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Our housing and auto sectors are leading us not out of recession, but into it."
What's more, the Fed no longer has the ability to kick-start recovery by lowering interest rates. The central bank has already effectively lowered the short-term rates it controls to zero.
And there are no guarantees the massive economic stimulus package and series of bank bailouts will stave off a nightmare recession, or worse.
"It is certainly plausible that the kinds of policy measures that have been good enough to tame the business cycle are no longer adequate in a fast-moving, highly leveraged, highly networked economy," said Anirvan Banerji of the Economic Cycle Research Institute.
Today's economic indicators don't project a depression. But Banerji is cautious. Economic data in 1929 didn't show that the stock market crash was about to lead to years of economic misery, either.
"It did not look like the kind of plunge that would be a depression until after the recession began," Banerji said. "The Great Depression didn't start out as a depression. It started out as a recession."
The depression that consumed most of the 1870s and followed something called the Panic of 1873 makes a better comparison to what's happening now, said Scott Nelson, a history professor at the College of William and Mary.
Financial markets had become centrally located by the 1870s, notably in London. And nations had not yet enacted the protectionist trade policies that were in place by the 1930s.
The results were not exactly promising. Gangs of orphans roamed city streets as men moved west to pursue cattle industry jobs. Widows struggled to make money by serving unlicensed liquor. Thousands of workers, many Civil War veterans, became transients.
The downturn lasted more than five years, according to the economic research bureau — four times as long as what the United States has endured so far in this downturn.
Today's recession is already longer than all but two of the downturns since World War II. But for now, public officials are being extremely cautious about the D-word. Alfred Kahn, a top economic adviser to President Carter, learned that lesson in 1978 when he warned that rampaging inflation might lead to a recession or even "deep depression."
When presidential aides asked him to use another term, Kahn promised he'd come up with something completely different.
"We're in danger," he said, "of having the worst banana in 45 years."
Tuesday, March 3, 2009
Dow below 6,800; lowest close since ’97
NEW YOR, March 3 – Investor worries about the economy in general, and financial companies in particular, continued to erode the markets on Monday as the Dow Jones industrial average fell below 7,000 for first time since October 1997.
“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “Okay, there are signs that some of the leading indicators have stabilised to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again – in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”
At the close, the Dow was down 299.64 points, or 4.2 per cent to 6,763.29, while the Standard & Poor’s 500-stock index declined 34.27 points or 4.6 per cent , to 700.82. The Nasdaq fell 3.9 per cent or 54.99 points to 1,322.85.
Investors expressed concern about the ability of banks to raise more capital, after the British bank, HSBC Holdings, offered new shares at a substantial discount. HSBC Holdings, the global British bank, fell 18.7 per cent after the bank said it would seek to raise nearly $18 billion in capital from shareholders and shut down its American consumer lending business.
Washington also agreed on Monday to provide another $30 billion to the insurance giant, American International Group, which also reported a $61.7 billion loss. On Friday, Washington took a larger stake in Citigroup, reducing the value of shareholders’ stock.
“Another day, another 200 points,” David Dietze, chief investment strategist at Point View Financial Services, said, comparing the daily markets to water torture.
The decision by many companies to trim dividends – one of the remaining incentives for owning stocks – was contributing to the sell-off, Dietze said.
Earlier Monday, the large regional bank PNC Financial Services Group cut its dividend 85 per cent and the International Paper Company cut its by 90 per cent. Last week, General Electric cut its dividend 68 per cent , and JPMorgan Chase reduced its dividend 87 per cent.
Looking ahead, he said: “All eyes are on that Friday unemployment report.”
“We could be in for a shocker,” he said. Economists expect a loss of 675,000 jobs in February, following a decline of 598,000 in January. The unemployment rate is expected to rise to 8 per cent , from 7.6 per cent.
The declines on Monday were across the board, led by the banking and basic materials sector.
Citigroup was down 17.9 per cent while Bank of America down 7.9 per cent. JPMorgan Chase declined 6.2 per cent. The S&P financial sector was down 5.8 per cent overall.
BNP Paribas fell 8.3 per cent , Royal Bank of Scotland fell 2.5 per cent and UBS fell 10.6 per cent in Europe, while Mitsubishi UFJ fell 6.9 per cent and Mizuho Financial Group 3.7 per cent in Tokyo.
Shares of A.I.G. were 7.2 per cent higher on the strength of the latest government assistance.
Dietze said that investors were also concerned about the message that they were hearing from governments. In Europe, over the weekend, stronger countries refused to come to the aid of smaller, struggling governments.
And out of Washington, he said, the message continues to be inconsistent.
The Senate has delayed confirmation of some members of the administration’s economic team, and the government has yet to value the toxic mortgage assets it has accepted from financial institutions.
“As bad as things are, they can still get worse, and get a lot worse,” Bill Strazzullo, chief market strategist for Bell Curve Trading, told The Associated Press. Strazzullo said he believed there was a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
The “game-changer,” he told The A.P., will be the housing market and whether it can stabilise.
Crude oil settled at $40.70 a barrel, down $4.06 in New York trading.
Bond prices rose Monday as investors sought safety while the yield on the three-month T-bill fell slightly.
Wall Street followed both Europe and Asia lower. In economic news on Monday, personal spending rose 0.6 per cent in January and incomes rose 0.4 per cent , while construction spending fell 3.3 per cent. Manufacturing contracted in February for the 13th month, but at a slower pace than expected.
The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 4.7 per cent , while the FTSE 100 index in London dropped 5.3 per cent. The CAC 40 in Paris fell 4.4 per cent and the DAX in Frankfurt fell 3.4 per cent.
Currencies across Eastern Europe plunged Monday after European Union leaders rejected a huge rescue package for its newest members. Officials in Brussels rejected suggestions that the foreign exchange markets were reacting to decisions made at a summit meeting Sunday, where leaders agreed only to consider any bailouts on a case-by-case basis.
The monetary affairs commissioner Joaquín Almunia told reporters in Brussels that the European Union was providing a huge amount of support to its eastern members. But he conceded more may be needed for some countries.
Still, bank analysts and traders were unimpressed, as reflected in sharp currency market drops.
“The EU again has proven it is unable to manage a coordinated response to the crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in Eastern Europe will put further pressure on the euro.”
The Tokyo benchmark Nikkei 225 stock average fell 3.8 per cent , while the S&P/ASX 200 in Sydney shed 2.8 per cent. The Hang Seng index in Hong Kong dropped 3.9 per cent.
The TSX in Toronto dropped 5.9 per cent after the government reported that Canada’s economy shrank in the fourth quarter for the first time since 1991. Statistics Canada said on Monday the economy contracted at an annualised rate of 3.4 per cent in the quarter, the worst performance since the first quarter of 1991.
Economic data and company earnings in recent weeks have eroded hopes that a gradual recovery would start to materialize during the second half of the year. If, as seems increasingly likely, a tangible recovery will not come until 2010 at the earliest, Evans said, “that means corporate earnings will remain extremely soft for quite some time.”
“And that in turn means it’s pretty clear that there is more value to be had in safe havens like bonds than in equities,” he added.
Economic data from Europe added to the dismal atmosphere in the market.
The Markit euro zone manufacturing purchasing managers’ index sank in February to a record low of 33.5 from 34.4 in January.
On Monday, the Japan Automobile Dealers Association said in a statement that auto sales in February declined 32.4 per cent , the seventh consecutive monthly decline.
Japan last week reported that exports in January declined by nearly half from a year ago, while South Korea on Monday released data for February – the first in the region to issue data for that month – showing a 17 per cent plunge in exports. – NYT
“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “Okay, there are signs that some of the leading indicators have stabilised to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again – in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”
At the close, the Dow was down 299.64 points, or 4.2 per cent to 6,763.29, while the Standard & Poor’s 500-stock index declined 34.27 points or 4.6 per cent , to 700.82. The Nasdaq fell 3.9 per cent or 54.99 points to 1,322.85.
Investors expressed concern about the ability of banks to raise more capital, after the British bank, HSBC Holdings, offered new shares at a substantial discount. HSBC Holdings, the global British bank, fell 18.7 per cent after the bank said it would seek to raise nearly $18 billion in capital from shareholders and shut down its American consumer lending business.
Washington also agreed on Monday to provide another $30 billion to the insurance giant, American International Group, which also reported a $61.7 billion loss. On Friday, Washington took a larger stake in Citigroup, reducing the value of shareholders’ stock.
“Another day, another 200 points,” David Dietze, chief investment strategist at Point View Financial Services, said, comparing the daily markets to water torture.
The decision by many companies to trim dividends – one of the remaining incentives for owning stocks – was contributing to the sell-off, Dietze said.
Earlier Monday, the large regional bank PNC Financial Services Group cut its dividend 85 per cent and the International Paper Company cut its by 90 per cent. Last week, General Electric cut its dividend 68 per cent , and JPMorgan Chase reduced its dividend 87 per cent.
Looking ahead, he said: “All eyes are on that Friday unemployment report.”
“We could be in for a shocker,” he said. Economists expect a loss of 675,000 jobs in February, following a decline of 598,000 in January. The unemployment rate is expected to rise to 8 per cent , from 7.6 per cent.
The declines on Monday were across the board, led by the banking and basic materials sector.
Citigroup was down 17.9 per cent while Bank of America down 7.9 per cent. JPMorgan Chase declined 6.2 per cent. The S&P financial sector was down 5.8 per cent overall.
BNP Paribas fell 8.3 per cent , Royal Bank of Scotland fell 2.5 per cent and UBS fell 10.6 per cent in Europe, while Mitsubishi UFJ fell 6.9 per cent and Mizuho Financial Group 3.7 per cent in Tokyo.
Shares of A.I.G. were 7.2 per cent higher on the strength of the latest government assistance.
Dietze said that investors were also concerned about the message that they were hearing from governments. In Europe, over the weekend, stronger countries refused to come to the aid of smaller, struggling governments.
And out of Washington, he said, the message continues to be inconsistent.
The Senate has delayed confirmation of some members of the administration’s economic team, and the government has yet to value the toxic mortgage assets it has accepted from financial institutions.
“As bad as things are, they can still get worse, and get a lot worse,” Bill Strazzullo, chief market strategist for Bell Curve Trading, told The Associated Press. Strazzullo said he believed there was a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
The “game-changer,” he told The A.P., will be the housing market and whether it can stabilise.
Crude oil settled at $40.70 a barrel, down $4.06 in New York trading.
Bond prices rose Monday as investors sought safety while the yield on the three-month T-bill fell slightly.
Wall Street followed both Europe and Asia lower. In economic news on Monday, personal spending rose 0.6 per cent in January and incomes rose 0.4 per cent , while construction spending fell 3.3 per cent. Manufacturing contracted in February for the 13th month, but at a slower pace than expected.
The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, was down 4.7 per cent , while the FTSE 100 index in London dropped 5.3 per cent. The CAC 40 in Paris fell 4.4 per cent and the DAX in Frankfurt fell 3.4 per cent.
Currencies across Eastern Europe plunged Monday after European Union leaders rejected a huge rescue package for its newest members. Officials in Brussels rejected suggestions that the foreign exchange markets were reacting to decisions made at a summit meeting Sunday, where leaders agreed only to consider any bailouts on a case-by-case basis.
The monetary affairs commissioner Joaquín Almunia told reporters in Brussels that the European Union was providing a huge amount of support to its eastern members. But he conceded more may be needed for some countries.
Still, bank analysts and traders were unimpressed, as reflected in sharp currency market drops.
“The EU again has proven it is unable to manage a coordinated response to the crisis,” Commerzbank analysts wrote in a note Monday. “The problems arising in Eastern Europe will put further pressure on the euro.”
The Tokyo benchmark Nikkei 225 stock average fell 3.8 per cent , while the S&P/ASX 200 in Sydney shed 2.8 per cent. The Hang Seng index in Hong Kong dropped 3.9 per cent.
The TSX in Toronto dropped 5.9 per cent after the government reported that Canada’s economy shrank in the fourth quarter for the first time since 1991. Statistics Canada said on Monday the economy contracted at an annualised rate of 3.4 per cent in the quarter, the worst performance since the first quarter of 1991.
Economic data and company earnings in recent weeks have eroded hopes that a gradual recovery would start to materialize during the second half of the year. If, as seems increasingly likely, a tangible recovery will not come until 2010 at the earliest, Evans said, “that means corporate earnings will remain extremely soft for quite some time.”
“And that in turn means it’s pretty clear that there is more value to be had in safe havens like bonds than in equities,” he added.
Economic data from Europe added to the dismal atmosphere in the market.
The Markit euro zone manufacturing purchasing managers’ index sank in February to a record low of 33.5 from 34.4 in January.
On Monday, the Japan Automobile Dealers Association said in a statement that auto sales in February declined 32.4 per cent , the seventh consecutive monthly decline.
Japan last week reported that exports in January declined by nearly half from a year ago, while South Korea on Monday released data for February – the first in the region to issue data for that month – showing a 17 per cent plunge in exports. – NYT
Monday, January 12, 2009
Oil falls below $39 as investors eye US earnings
By JAKE NEUBACHER, Associated Press Writer Jake Neubacher, Associated Press
VIENNA, Austria – Oil prices fell Monday on concerns over global economic growth, with key U.S. corporate earnings results expected to give a new reading on crude demand in the world's largest consuming nation.
Economic worries outweighed factors that would normally boost the market — Mideast tensions, signs that OPEC was implementing large-scale production cuts and the Gazprom-Ukraine gas dispute.
Light, sweet crude for February delivery was down $2.03 to $38.80 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. The contract on Friday fell 87 cents to settle at $40.83.
Steel producer Alcoa, chip maker Intel and biotech company Genentech are expected to report fourth quarter results this week, providing investors with a gauge of how deep the current recession may be.
"Given that we're likely to see quite a few rather poor fourth quarter earnings reports, downward pressure will continue to be exerted on oil," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "Worries about the macroeconomic outlook will continue to constrain oil."
Although still far away from their Dec. 19 closing of $33.87, oil prices fell 17 percent last week, weighed by fears that rising U.S. unemployment will undermine crude demand.
The Labor Department said Friday that employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. The nation's unemployment rate jumped to 7.2 percent, the highest since 1993.
"It seems that demand worries continue to dominate market psychology and not even the tensions in the Middle East, OPEC production cuts or the gas row between Russia and Ukraine were able to pull up prices." said Vienna's JBC Energy in a research note.
Still, those bearish factors were expected to keep further price erosion in check.
"We have these other factors that will support oil," Shum said. "Most likely, we won't see a big downward spiral despite the poor earnings reports."
Prices of futures contracts for later this year suggest investors expect oil to recover. The March contract trades near $46 a barrel while the April contract trades above $49.
"The expectation is that pricing will regain strength, and it's not a question of if but when," Shum said.
In other Nymex trading, gasoline and heating oil futures slid by more than 3 cents to $1.08 and $1.45 a gallon, while natural gas for February delivery remained steady at $5.52 per 1,000 cubic feet.
In London, February Brent crude fell $1.86 to $42.56 a barrel on the ICE Futures exchange.
___
Associated Press writer Alex Kennedy contributed to this report from Singapore.
VIENNA, Austria – Oil prices fell Monday on concerns over global economic growth, with key U.S. corporate earnings results expected to give a new reading on crude demand in the world's largest consuming nation.
Economic worries outweighed factors that would normally boost the market — Mideast tensions, signs that OPEC was implementing large-scale production cuts and the Gazprom-Ukraine gas dispute.
Light, sweet crude for February delivery was down $2.03 to $38.80 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. The contract on Friday fell 87 cents to settle at $40.83.
Steel producer Alcoa, chip maker Intel and biotech company Genentech are expected to report fourth quarter results this week, providing investors with a gauge of how deep the current recession may be.
"Given that we're likely to see quite a few rather poor fourth quarter earnings reports, downward pressure will continue to be exerted on oil," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore. "Worries about the macroeconomic outlook will continue to constrain oil."
Although still far away from their Dec. 19 closing of $33.87, oil prices fell 17 percent last week, weighed by fears that rising U.S. unemployment will undermine crude demand.
The Labor Department said Friday that employers slashed 524,000 jobs in December and 2.6 million jobs for all of 2008. The nation's unemployment rate jumped to 7.2 percent, the highest since 1993.
"It seems that demand worries continue to dominate market psychology and not even the tensions in the Middle East, OPEC production cuts or the gas row between Russia and Ukraine were able to pull up prices." said Vienna's JBC Energy in a research note.
Still, those bearish factors were expected to keep further price erosion in check.
"We have these other factors that will support oil," Shum said. "Most likely, we won't see a big downward spiral despite the poor earnings reports."
Prices of futures contracts for later this year suggest investors expect oil to recover. The March contract trades near $46 a barrel while the April contract trades above $49.
"The expectation is that pricing will regain strength, and it's not a question of if but when," Shum said.
In other Nymex trading, gasoline and heating oil futures slid by more than 3 cents to $1.08 and $1.45 a gallon, while natural gas for February delivery remained steady at $5.52 per 1,000 cubic feet.
In London, February Brent crude fell $1.86 to $42.56 a barrel on the ICE Futures exchange.
___
Associated Press writer Alex Kennedy contributed to this report from Singapore.
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