The U.S. economy probably nosedived in the final months of last year, a trajectory that’s likely to continue in early 2009 as soaring unemployment wallops consumer spending, economists said before a government report today.
Gross domestic product contracted at a 5.5 percent annual pace from October through December, according to the median estimate of 79 economists surveyed by Bloomberg News. It would be the biggest drop since 1982 and follow a 0.5 percent decline the previous three months.
The economy is likely to contract further in the first three months of this year as retailers and manufacturers, from Starbucks Corp. to Boeing Co., this week announced plans to slash payrolls and cut production. Today’s report will put pressure on President Barack Obama to win quick congressional approval of a fiscal stimulus package.
“It’s one of the deepest recessions in two generations,” said Roger Kubarych, chief U.S. economist for UniCredit Global Research in New York. “It’s still getting worse.”
The Commerce Department’s GDP report is due at 8:30 a.m. in Washington. Estimates of economists surveyed by Bloomberg News ranged from declines of 3 percent to 7 percent. The report is the first for the quarter and will be revised in February and March as more information becomes available.
The Federal Reserve this week said it’s prepared to purchase Treasury securities to shore up lending and warned inflation may recede too rapidly. It voted to leave the benchmark interest rate as low as zero.
‘Significant’ Risk
Fed officials also said there was a “significant” risk the economy wouldn’t start recovering until 2010.
A lack of credit, record foreclosures and mounting job losses have forced households to retrench. Consumer spending, the largest part of the economy, is forecast to have dropped at a 3.5 percent pace last quarter after slumping at a 3 paydayloans.8 percent rate the previous three months. It would be the first time purchases declined more than 3 percent in consecutive quarters since records began in 1947.
Americans may pull back further as employers slash payrolls. Companies cut 524,000 workers in December, bringing total job cuts for last year to almost 2.6 million.
More cutbacks are on the way. Boeing, Starbucks, Home Depot Inc. and Texas Instruments Inc. are among U.S. companies that announced thousands of layoffs this week.
Retailers are among businesses eliminating workers following the worst holiday shopping season since the International Council of Shopping Centers started tracking data in 1969.
Cutbacks Spread
The economic slump is likely to persist as companies join consumers in cutting back. Orders for durable goods - items meant to last at least three years - declined each month from October through December, signaling businesses plan to cut spending on new equipment.
Residential construction has also taken a turn for the worse as credit dried up. Home starts and building permits both dropped to record lows in December, according to Commerce figures, indicating housing will remain a drag on growth in 2009 and extend the four-year-old housing recession.
Caterpillar Inc., the world’s largest maker of bulldozers and excavators, this week said it’s cutting 20,000 jobs, and profit and sales this year will trail analysts’ estimates.
“We are expecting recessionary conditions to persist in most of the world throughout the year, with no growth in the world economy,” Chief Executive Officer Jim Owens said Jan. 26 on a conference call with analysts. “Quite frankly, the best hope, I think, is a stimulus package in the U.S. and China, driving demand for commodities.”
Citigroup Inc (), which has received $45 billion of capital from the U.S. government, is going through with plans to buy a $50 million jet, but a U.S. senator called the deal absurd and wants the Obama administration to block it.
The bank signed a contract several years ago to buy a Dassault Falcon 7X and plans to accept delivery later this year, according to a person familiar with the matter.
Citigroup said in a statement that refusing delivery now would result in millions of dollars of penalties. The bank also said it is selling existing aircraft, the proceeds of which will more than pay for the new plane.
The New York Post, which was first to report the bank was still buying the new plane, said earlier on Monday that Citigroup was selling two jets estimated to be worth $27 million each.
In Washington, the White House frowned on the purchase with a spokesman saying President Barack Obama does not believe “that’s the best use of money” by companies that are receiving taxpayer assistance.
Citigroup said it is not using funds it received from the government’s Troubled Asset Relief Program to pay for the jet and it will continue to comply with all TARP requirements. The new jet will be more fuel efficient and will lower Citigroup’s operating expenses, the bank said.
Sen. Carl Levin, a Michigan Democrat, wants the Treasury Department to block the sale.
“To permit Citigroup to purchase a plush plane — foreign- built no less — while domestic auto companies are being required to sell off their jets is a ridiculous double standard,” Levin said pay day loans.
Levin said he urged Timothy Geithner, who won U.S. Senate approval to be Treasury secretary later on Monday, to “do what he can to stop this absurdity from occurring.”
Detroit-based General Motors Corp () and Chrysler LLC were barred by the Bush administration from operating corporate jets as part of their December bailout.
A decision by auto CEOs to fly their corporate aircraft to Washington last fall to ask for help nearly cost the industry its bailout as congressional lawmakers were sharply critical of what they considered excessive spending and poor judgment.
HIT BY TURBULENCE
Democrats drafting corporate bailout legislation this month sought to curb the use of company jets for those receiving federal assistance. The proposed restriction was scrapped, however, out of concern it might hurt companies that make and support business aircraft.
Industry deliveries topped 1,100 in 2007 and were up in the first nine months of 2008 compared with the same period a year earlier, according to the General Aviation Manufacturers Association.
But the industry has hit turbulence in the souring economy.
Republicans in the House of Representatives told President Barack Obama on Friday the best way to boost the economy would be to cut income taxes, rather than the Democratic plan which puts more focus on government spending.
Republicans complain that $550 billion of the Democrats’ $825 billion stimulus package was government spending, with only $275 billion in tax cuts which they say would better spur job growth and pull the economy out of a year-long recession.
Both sides said on Friday they expected to get a stimulus package for Obama to sign by his mid-February deadline. But they continued to disagree on details, with Republicans saying they have been shut out of the discussion.
Republicans handed their alternatives to Obama at a bipartisan White House meeting and planned to press their ideas when the package comes to a House vote on Wednesday.
“We expressed our concerns about some of the spending that’s being proposed in the House bill and the fact that it doesn’t spend out very quickly,” Rep. John Boehner, the top House Republican, told reporters after the meeting.
House Republicans were to meet with Obama privately next week but Boehner said “we felt that as fast as this package is moving, we needed to share those ideas with him today.”
Despite the differences, Senate Minority Leader Mitch McConnell predicted the bill would pass by mid-February.
“I do think we’ll be able to make the president’s deadline,” he said payday loan.
House Speaker Nancy Pelosi said she felt Obama helped allay some Republican concerns. “I have a good feeling coming out of the meeting that we’ll be able to reach more bipartisanship as we go forward,” she said.
TAX BREAKS
The Democratic tax cut plan would direct benefits more toward lower-income workers, even those who do not pay income taxes, while the Republicans would help all income taxpayers. The Republicans do not know yet the cost of their plan.
Republicans have so far failed to significantly change the legislation despite offering amendments to boost tax cuts and slash government spending.
The Republican proposals include cutting the lowest two income tax brackets, from 15 percent to 10 percent and from 10 percent to 5 percent, while also offering small businesses a tax deduction equal to 20 percent of their income.
Democrats have proposed a tax cut of $500 for individuals earning up to $75,000 and $1,000 for families earning up to $150,000. Republicans said their plan would give families an average of $1,700 in savings.
The Republicans also proposed helping those who have lost their jobs by eliminating taxes on unemployment benefits. They also urged that the legislation bar higher taxes to pay for the anticipated increased spending.
Johnson & Johnson reported higher quarterly earnings on Tuesday as cost cuts offset weak sales of its drugs, devices and consumer products amid the economic downturn, but J&J forecast 2009 earnings below expectations.
Company Chief Executive William Weldon, in a meeting with analysts, said consumers are becoming more frugal due to economic hardships and cited expectations that unemployment would continue to rise and hurt global healthcare sales.
“I remain optimistic about our ability to adjust to evolving economic conditions,” he said, even though patients are cutting back on medical treatments, including elective surgical procedures.
The diversified healthcare company reported fourth-quarter earnings of $2.71 billion, or 97 cents per share, compared with $2.37 billion, or 82 cents per share, a year earlier.
“Fourth quarter sales missed across all divisions, both international and domestic,” Leerink Swann analyst Rick Wise said in a research report.
Another drugmaker, Forest Laboratories Inc (), posted a 38 percent decline in quarterly profit Tuesday on charges for licensing new medicines, but shares rose because operating results far exceeded analyst targets thanks to lower-than-expected spending.
Excluding special items, J&J () earned 94 cents per share. Analysts polled by Reuters Estimates, on average, expected 92 cents per share.
J&J expects full-year 2009 earnings of $4.45 to $4.55, excluding items but including expected dilution of 3 cents to 5 cents per share from J&J’s purchase of medical device company Mentor Corp fast payday advance.
On that basis, analysts polled by Reuters Estimates, on average, were expecting $4.58 per share.
Global quarterly sales fell 4.9 percent to $15.2 billion, well below the Reuters Estimates forecast of $15.9 billion. Sales would have fallen only 1 percent if not for the strengthening dollar, which lowers overseas sales when converted back into U.S. currency.
Even as the stronger dollar hurt overseas sales, Leerink’s Wise said a number of important brands continue to lose U.S. market share, including arthritis drug Remicade, epilepsy treatment Topamax and J&J’s Ethicon surgical products.
Global sales of prescription drugs fell 11 percent to $5.69 billion, as two thirds of revenue from J&J’s Risperdal schizophrenia drug vanished due to new generic competition for the product.
Moreover, sales of Remicade — usually a fast-growing product — slipped 2.4 percent to $886 million. And sales of the company’s anemia drugs fell 11 percent to $560 million, on continuing concerns about safety of such medicines. Topamax, an epilepsy drug which will face generic competition in March, rose 4.3 percent to $680 million.
Sales of company medical devices, which have bolstered results over the past year, declined 1.9 percent to $5.64 billion.
Consumer product sales edged up 1.2 percent in the quarter to $3.86 billion, providing a weaker lift than in recent quarters.
Japan’s top two automakers, Toyota () and Honda (), will slash output further to counter swelling inventories as auto sales slump, while third-ranked Nissan () is seen shifting some output abroad to cut costs.
Subaru maker Fuji Heavy () became the latest auto firm to forecast losses this fiscal year as a spreading global recession dampens demand in mature markets and puts the brakes on sales in emerging markets.
The economic woes are also affecting motorcycle demand, and Yamaha Motor () said it would halt production at 11 plants for up to 10 days.
Toyota Motor’s announcement of output cuts at North American plants followed General Motors’ () warning that its U.S. auto sales this year would hit the lowest in 27 years.
Toyota, which expects a first ever annual operating loss this business year, said its inventory of North American-built vehicles was 80-90 days, having doubled in the past year. It hopes to cut that by half in the second quarter.
“The current inventory level is a record high for Toyota, though the market slump is unprecedented so rising inventories are unavoidable,” said Okasan Securities analyst Yasuaki Iwamoto.
“Sales are falling 30-40 percent every month, and this pace of fall is unheard of for either Toyota or the overall industry,” he said. “Automakers have to cope with it through production cuts as quickly as possible instant cash advance.”
Toyota has previously said it will halt production at its Japanese plants for 11 days in February and March.
The world’s biggest automaker had already reduced North American production of its best-selling cars, including the Camry and Corolla sedans, and suspended work on a new plant in Mississippi that was due to start producing the popular Prius hybrid from 2010.
HONDA, NISSAN SCALE BACK
Honda said it would reduce its domestic output by an additional 56,000 units, expecting its Japan production to total 1.168 million units this business year to March, against its original target of 1.31 million.
Nissan also announced further output cuts in Japan on Thursday and a source said it would book an annual operating loss.
Nissan was aiming to cut production costs by 30 percent by making its March subcompact in Thailand instead of Japan, the Nikkei newspaper reported on Friday.
Shares in Toyota and Honda jumped 6 percent and 8 percent respectively, helped by a weaker yen. Nissan added 3.8 percent, outperforming the Nikkei average’s .N225 2.6 percent rise.
TOUGH ENVIRONMENT
The British economy slumped the most in at least two decades during the fourth quarter and home sales dropped to the lowest since the measure began in 1978 as the recession deepened, reports by lobby groups showed.
The British Chambers of Commerce’s survey of almost 6,000 companies showed the weakest results since it started in 1989, the London-based group said today. The average number of home sales per surveyor slipped and retail sales had the worst December in 14 years, reports by the Royal Institution of Chartered Surveyors and British Retail Consortium showed.
The Bank of England reduced the benchmark interest rate to 1.5 percent last week, the lowest in the bank’s history. Prime Minister Gordon Brown yesterday promised 500 million pounds ($745 million) to encourage hiring and pledged to help thaw lending as Britain faces its first recession since 1991.
“This recession is worse than in the 1990s,” David Frost, managing director of the BCC, told journalists at a briefing yesterday. “The situation is dire, and the Monetary Policy Committee is running out of bullets.”
The central bank said last week that further measures will be needed to return the economy to growth as interest rates approach zero. That may include purchasing bonds or other assets after the U.S. Federal Reserve this month started buying up securities backed by mortgages.
Fathom Financial Consulting suggested last week that the government should start buying homes in danger of repossession. Property values dropped 15.9 percent last year, the most since at least 1991, Nationwide Building Society said Jan. 6.
Property Slump
The average number of home sales per surveyor slipped to 10.1, the lowest in at least three decades, from 10.6 in the quarter through November, RICS said.
The RICS report still suggested that the property bust may have started to bottom out. The index for house prices, which is the percentage difference between the surveyors reporting higher prices and those reporting price declines, rose to minus 73 last month paydayloans.com. That’s the highest since February.
A separate report by the Department for Communities and Local Government today showed that house prices fell an annual 8.6 percent in November, with values declining in all regions of the country. They slipped 1.9 percent from October to an average of 199,732 pounds.
Retail sales fell 3.3 percent from a year ago last month, the worst December number in the past 14 years, led by clothing and furniture, according to the BRC. The group represents 80 percent of U.K. retailers.
‘Truly Dreadful’
“These are truly dreadful numbers,” Stephen Robertson, director general of the BRC, said in a statement. “Retailers had a torrid December despite a blizzard of promotions and deals, which would have hit margins.”
The economy shrank 1.5 percent in the fourth quarter, the most since 1980, the National Institute for Economic and Social Research said Jan. 10. The statistics office reported a 0.6 percent contraction in the third quarter.
“We hope that the speed of the decline is matched by the speed of the recovery,” BCC’s Frost said. The group, which represents 100,000 companies, said its index of manufacturing sales at home fell to minus 38 from minus 13. The service index fell to minus 31 from minus seven.
The U.K. trade deficit unexpectedly widened to a record in November as the global slump weakened demand for British products abroad, the statistics office said today. The goods- trade gap was 8.3 billion pounds, compared with 7.6 billion pounds in October.
With the largest industrial economies in recession, British exports are getting little help from the pound’s 24 percent decline against the euro last year and a loss of 28 percent against the dollar.
Wal-Mart Stores Inc led U.S. retailers in disappointing December same-store sales and profit warnings on Thursday, sparking fresh recession concerns that hit stock and currency markets.
Nearly a dozen retailers, including Macy’s and Target Corp, told investors that profits would take a further hit in the fourth quarter, which includes key holiday sales.
The U.S. recession, job losses and winter storms right before Christmas contributed to the worst holiday shopping season in up to four decades.
Wal-Mart, the world’s largest retailer, said sales at U.S. stores open at least a year rose 1.7 percent, excluding gasoline, worse than Wall Street’s expectation of a 2.8 percent increase. It also cut its profit forecast for its fourth quarter, which began on November 1.
The company’s shares fell 7.6 percent, leading a 0.3 percent decline in the Standard & Poor’s retail index.
The Wal-Mart news also tempered wider market appetite for risk on Thursday, pushing U.S. stocks lower, helping U.S. Treasury debt prices to extend their gains in a safe haven bid and prompting a tumble in the U.S. dollar against the yen.
Other retailers posting big share declines were Abercrombie & Fitch Co., down 6.5 percent after saying that fourth-quarter profit would be significantly below its previous forecast, and jeweler Zale Corp, which fell 7.4 percent.
Wal-Mart said groceries and health-related products saw mid-single-digit percentage sales gains in December, while demand for clothing and jewelry was soft cash loans.
“Due to the difficult economy and severe winter weather in some regions, the holiday season was more challenging for retailers than expected,” said Wal-Mart Vice Chairman Eduardo Castro-Wright.
The report from Wal-Mart was the latest sign of how the recession has prompted consumers to cut down on any but the most essential purchases.
“The economy is in real difficult shape here, and their core consumers, lower- and middle-income consumers, that have really been flocking there cut back on discretionary spending,” said Ken Perkins, president of research firm Retail Metrics.
REPEATED MARKDOWNS
Retailers across the board offered deep discounts to lure shoppers in the holiday season, often repeatedly marking down items like clothing as traffic to stores proved weak.
With consumers reeling from a recession, job uncertainty, tighter credit and falling stock portfolios, analysts see little reason for retail to rebound in the first half of 2009.
Of 22 retailers that reported sales on Thursday morning, 11 beat sales estimates, 10 missed and one matched, according to Thomson Reuters.
A self-serving state deliberately impoverishes the countryside, stifling business and sending illiteracy soaring, in favor of building skyscraper-raked metropolises admired by the foreign capitalists it woos.
Welcome to the China of U.S. academic Yasheng Huang, whose trenchant analysis of the country’s 30 years of market reforms will discomfit those betting the current economic downturn is but a blip in the Middle Kingdom’s inexorable ascent.
Without root-and-branch political reform, Huang argues in ‘Capitalism with Chinese Characteristics’, China faces “monumental odds” in rebalancing an urban, state-driven economy where consumption has been sacrificed on the altar of investment.
“The next five years will be a litmus test for whether the country will emerge as another East Asian miracle or as a Latin American version of a vicious cycle of dashed expectations and perpetual turbulence,” Huang, an international management professor at the Massachusetts Institute of Technology, writes.
Huang’s thesis is that China’s true economic miracle occurred in the 1980s due to an explosion of rural entrepreneurship as farmers who had lived through the Cultural Revolution gained confidence that starting a business would no longer mean arrest.
All that changed in the political turmoil that followed the 1989 Tiananmen Square crackdown. Former President Jiang Zemin and Premier Zhu Rongji — who did not share the background of their predecessors running agricultural provinces — set about reversing many of the productive rural policy experiments of the previous decade, including easier access to credit.
The result, Huang documents, is that household income growth has lagged gross domestic product growth since the early 1990s faxless cash advances.
With the fruits of growth going increasingly to capital, mainly to big state-owned firms, the labor share of national income fell to 48 percent of GDP in 2005, one of the lowest proportions in the world, from 53 percent in 1990.
Output, in short, has benefited Chinese citizens less and less, stunting private consumption and forcing Beijing to take up the slack by massively stimulating infrastructure investment.
“A central mechanism of the growth model of the 1990s was to finance state-led, urban China by heavily taxing entrepreneurial rural China,” Huang writes.
TURNAROUND UNDER HU
Stephen Green, head of China research at Standard Chartered Bank in Shanghai, says Huang neglects some of the policy achievements of the 1990s, notably the overhaul of hulking state-owned firms and the launch of banking sector reforms.
But he calls Huang’s dissection of China’s reform period important, coherent and depressing.
“Perhaps its greatest contribution is to provide a comprehensive critique of a set of policies, many of which are still doing their damage, while at the same time pointing to the real source of China’s growth,” Green said in a note to clients.
Huang marshals a vast array of statistics to buttress his conjecture that, in contrast to the entrepreneurial capitalism of the 1980s, the welfare of ordinary Chinese did not keep pace with GDP growth under the state-led capitalism of the 1990s.
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