US - Economic Data & News 01 (May 08 - Jul 08)

[millionairemind]

Published June 25, 2008

Will the Fed repeat its 1970s blunder?

By ROBERT SAMUELSON

FORGET the US housing collapse, the 'credit crunch' and - in isolation - higher oil prices. The real economic me-nace may be resurgent inflation, which is the broad rise of most prices. To understand why, some history helps.

The US government's worst domestic blunder since World War Two was the unleashing of high inflation: in 1960, annual inflation was 1.4 per cent; by 1979, it was 13.3 per cent. This terrified Americans, who feared falling living standards. It also destabilised the economy, causing harsher recessions that culminated with 10.8 per cent unemployment in 1982.

Americans don't want to go there again, and Federal Reserve chairman Ben Bernanke has been insisting that we won't. In a recent speech, he argued that the economy today is much different from the mid-1970s. He's right. In 1974, inflation was 12 per cent. Unemployment in the parallel recession peaked at 9 per cent in early 1975. We're not close to that havoc. Unfortunately, Mr Bernanke's comforting analogy is misleading. The question is not whether it's 1975; it's whether it's 1966.

It was then that the inflationary psychology - which later led to so much grief - took hold. Vietnam War spending and the Fed's easy money policies created an economic hothouse. Government officials and most academic economists underestimated the danger. Inflation crept from negligible levels to 3.5 per cent in 1966 and 6.2 per cent in 1969. There are eerie parallels now. From 1997 to 2003, inflation averaged slightly more than 2 per cent. Now it's 4 per cent; some economists soon expect 5 per cent.

Hmm. To be sure, differences abound. Then, we had a classic wage-price spiral. Strong consumer demand allowed businesses to raise prices, which spurred demands for higher wages that companies paid because they needed the workers and could recover the costs through higher prices. In 1959, labour costs rose 4 per cent; firms could offset most of that through efficiencies . By 1968, labour costs were up a less forgiving 8 per cent.

By contrast, today there's not yet a wage-price spiral. Inflationary pressures seem to originate mostly in rising raw materials prices. In 2002, oil was US$25 a barrel; now it's US$135. Corn was US$2.30 a bushel; now it exceeds US$7. Meanwhile, a powerful anti-inflationary force - cheaper manufactured imports - is waning. The weaker dollar and higher transport costs have raised import prices. In the past year, prices for imported consumer goods (excluding autos) are up 3.6 per cent.

The US seems to be hostage to global forces. Economists Richard Berner and Joachim Fels of Morgan Stanley call this the 'new inflation' because it is not easily squelched by domestic policies. Up to a point, that's true.

Although the Fed influences interest rates, it doesn't own oil rigs or cornfields. Long-term price relief for oil involves switching to more fuel-efficient vehicles and increasing worldwide oil production. Removing subsidies for corn-based ethanol would reduce food price pressures.

Still, all large inflations involve 'too much money chasing too few goods', as economist Milton Friedman often noted, and this episode is no exception. The Fed's easy money policies have global effects. Many countries peg their currencies to the dollar and shadow Fed policies. Meanwhile, oil producers and other commodity exporters have been flooded with dollars; in practice, the extra cash allows them to run easy money policies. The result is that, despite the US slowdown, much of the world is booming. Developing countries, now about half the global economy, have been growing at about 7 per cent since 2002.

Higher inflation is a worldwide phenomenon. In China and India, it's about 8 per cent. In Russia, it's 15 per cent.

One antidote to rising raw material prices is for the Fed to reverse its easy money policies. Combating inflation is rarely popular or easy, because it involves slowing the economy - even inducing a recession - to relieve pressures on prices and wages. Unemployment rises. There are usually plausible reasons for waiting. Surely there are now. Housing remains in disarray. More loan defaults could increase bank losses. No matter what the Fed does, there are dangers. Perhaps inflation will spontaneously subside because the economy is already weak.

But similar arguments for delay were made in the 1960s with disastrous results. The resulting inflationary psychology made inflation harder to extinguish. The initial unwillingness to take a modest slowdown or recession led to deeper recessions. There are now signs that we are at a similar juncture. Surveys show that people's 'inflationary expectations', after years of stability, are rising. The Fed is holding its key interest rate at 2 per cent, well below prevailing inflation. In the 1970s, this condition stoked inflation. An indecisive Fed risks repeating its previous blunder. -- The Washington Post Writers Group

[millionairemind]

Worst to Come as Credit Crisis Chokes Growth, Nucor CEO Says

By Stewart Bailey and Dale Crofts

June 26 (Bloomberg) -- The global credit crisis will slow construction and U.S. economic growth for at least 18 more months, Nucor Corp. Chief Executive Officer Dan DiMicco said.

``We haven't seen the worst impact on the economy yet,'' the CEO of the largest U.S. steel producer said yesterday in an interview in New York. ``The impact of the tighter credit controls is just starting to affect folks.''

The credit crisis, sparked by U.S. mortgage defaults, caused almost $400 billion in writedowns at the world's largest banks and securities firms in the past year. Standard & Poor's and Moody's Investors Service have tightened credit-rating measures, making it more difficult for companies to borrow money, DiMicco said.

While the crisis originated in the U.S., it's a worldwide phenomenon that will last through 2009 at least, DiMicco said.

``After that, who knows?'' DiMicco said. ``There are two camps: one saying we're in a recession, the other saying we're getting close to a recession. You don't hear anyone saying we're heading toward a recovery.''

The Federal Reserve said yesterday that ``tight credit conditions'' will curb economic growth in the next few quarters. American Express Co. CEO Kenneth Chenault said credit indicators have deteriorated beyond the company's expectations.

Nucor, based in Charlotte, North Carolina, rose 5 cents to $77.18 yesterday in New York Stock Exchange composite trading. The shares have gained 30 percent this year.

Tightened Credit

S&P has downgraded 345 companies this year as of June 24, the majority in the U.S., Sudeep Kesh, an associate in S&P global fixed income research, said in a telephone interview from New York.

Nucor has already felt the credit crunch, even with an A1 rating from Moody's and an A+ from S&P, in both cases the fifth-highest rating. Credit-rating companies threatened to withdraw Nucor's investment-grade status earlier this year if the company borrowed all of the $3 billion it wanted to finance expansion and acquisitions, DiMicco said.

The prospect of a downgrade, which would have cost Nucor ``hundreds of millions of dollars,'' was enough to force it to borrow only $1 billion and to sell new shares for the first time in its history to raise the remainder, DiMicco said.

Turmoil in credit markets has meant that ``even credit- worthy borrowers like Nucor are having to jump through greater hoops,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. ``The concept of Nucor being anything other than investment grade seems strange.''

Operating Costs

Tighter credit controls will raise operating costs for property developers and government agencies building bridges, roads, railways and industrial properties, DiMicco said. That is compounded by higher costs for steel and key raw materials such as iron ore and coal, he said.

Nucor produces 22 million tons of flat- and long-steel products a year from mills in states including Louisiana, Ohio and Texas.

``How are the states going to handle the highway work, and where is the federal government going to do anything about the infrastructure?'' DiMicco said. ``You need to be able to borrow more to do the same thing as before.''

To contact the reporters on this story: Stewart Bailey in New York at [email protected]; Dale Crofts in Chicago at [email protected].

[kennynah]

wow MM : noted you are extremely Bearish from all your postings so far.....

[millionairemind]

K,

No lah... just like to play BEAR sometimes..

I don't fixed my sides based on personal opinion or commentators on CNBC ...I just follow the mkt

But when Follow thro' comes, I very fast switch sides one.... super flexible......(or rather, spineless... )

mm

[kennynah]

26 Jun 2008 12:30 GMT

US DATA: Q1 GDP revised to +1.0% with very minor changes in components.

New data on imports/exports, medical care, and inventories boosted consumption and cut utilities' inventories.

More important is that Q2 growth seems to remain slow at a similar pace. Inflation measures changed little, with GDP px at +2.7%. Annual GDP revision is due Jul 31.

GDP Compnts: Q4 Final Q1 Est 1 Q1 Est 2 Q1 Final Est

Real GDP +0.6% +0.6% +0.9% +1.0%

Final Sales +2.4% -0.2% +0.7% +0.9%

PCE +2.3% +1.0% +1.0% +1.1%

Res Fix Invest -25.2% -26.7% -25.5% -24.6%

Nonres FixInvest +6.0% -2.5% -0.2% +0.6%

Net Exports add 1.02 add 0.22 add 0.80 add 0.79

Chg Pvt Invty cut 1.79 add 0.81 add 0.21 add 0.02

[kennynah]

horse odds below aug and sept races...

26 Jun 2008 12:37 GMT

FED FUND FUTURES: August tightening odds as below:
Immediately following June 25 FOMC: 48%
30-minutes after June 25 FOMC announcement: 37%
Close on June 25: 35%
Thursday 8:00 am: 30%
--
September tightening odds as below:
Immediately following June 25 FOMC: 70%
30-minutes after June 25 FOMC announcement: 65%
Close on June 25: 65%
Thursday 8:00 am: 62%

[kennynah]

26 Jun 2008 12:30 GMT
US DATA: Jobless claims was unchanged at 384,000 in the June 21 wk from the upwardly revised level the prv wk (original 381K.)

The Labor Dept analyst said no special factors affected the data, yet noted a pick-up in Iowa's unemployment benefits due to massive floods which have already totaled 4,000 for the week ahead.

Continuing claims for the June 14 week were up 82,000 to 3,139,000, the highest reading since the Feb. 7 week in 2004, and the 9th wk above the 3 mln mark.

[kennynah]

1005pm +8GMT 26Jun08

just heard at cnbc....

Mattel (the toy company) has a bigger market cap than General Motors....hahahaha...

jia lat man ....blood every where...

C is at multi year low
Wachovia at 18 years low..
BAC also multi year low....

[winston]

Home prices are poised to fall further in coming months, economists said Tuesday after a closely followed index showed that prices in April had fallen at their steepest year-over-year rate since at least 2000.

The price of a single-family home in April was 15.3% lower than in April 2007, the S&P/Case-Shiller index of 20 metro areas indicated. That was the largest year-over-year drop since the index was created eight years ago.

The sharpest declines were 26.8% in Las Vegas and 26.7% in Miami. For the first time, prices were down in all 20 cities; Charlotte saw its first year-over-year drop.

Collectively, home prices in the 20-city index have fallen to their level back in September 2004.
– USA Today

[millionairemind]

June 27, 2008, 10.08 am (Singapore time)

Former Fed insider Poole urges speedy rate hikes

NORTH EAST - The US Federal Reserve must quickly raise interest rates to stem inflation and will do lasting harm to the US economy if it fails to act, a top former Fed official said on Thursday.

'I think policy has been too accommodative and there is a substantial risk we'll see inflationary pressures more generally unless the Fed reverses,' said William Poole, who retired in March as St Louis Federal Reserve Bank president.

'The longer they delay, the greater the risk it will get into inflation expectations and wages,' Mr Poole, a noted anti-inflation hawk, said in an interview. 'I would look for opportunities to raise interest rates sooner rather than later.'

The Fed on Wednesday halted its latest easing campaign, holding rates steady at 2 per cent as it warned on inflation.

The Fed had slashed interest rates a total of 3.25 percentage points from September through April to protect the economy from the collapse of the housing market.

Mr Poole, who was a 10-year member of the Fed's interest-rate setting committee, said soaring energy prices have delivered a severe supply shock to the US economy that has impaired its productive capacity.

In his last vote on the Fed's policy-setting committee, he dissented against an emergency 75 basis point rate cut on Jan 22 to help calm panicked financial markets.

Mr Poole noted that US auto makers are idling factories building sport utility vehicles that have become unaffordable with petrol at US$4 a gallon. Similarly, the housing downturn has sidelined a large chunk of the construction industry's capacity while home builders wait for better times.

These forces have shunted US growth potential down a notch, and shielding employment by bolstering demand with low interest rates will just send prices higher.

'If we pump up demand in these circumstances with expansionary monetary policy ... we'll end up with inflation rather than higher demand resulting in more output,' he said over lunch near his home on Maryland's Eastern Shore.

In his view, the Fed should take back the emergency easing put in place to calm financial markets panicked by losses in the sub-prime mortgage market that led to the near-collapse of investment bank Bear Sterns, and then go clearly on hold.

'It is adequate at this time to say, 'We'll undo the emergency rate cuts, and define the magnitude (of that easing), and once we get there, we'll reassess the (situation).'

This would help communicate the Fed was not embarking on a prolonged-rate hike campaign, which otherwise might cause markets to tighten financial conditions by more than the Fed felt was warranted, unnecessarily hurting growth, Mr Poole said.

Cold comfort
Earlier on Thursday, Fed Vice Chairman Donald Kohn said in a speech that higher headline inflation had so far not shown up in core inflation - which strips out volatile energy and food prices - or inflation expectations.

Mr Poole, however, was not persuaded.

'A lot of people take comfort from the fact that inflation has not gotten into wages or core. But if you wait (for it) to get there, it is already too late.

'My reading of monetary policy is that it is very expansionary. Money growth has been high; real interest rates are substantially negative,' he said.

If the Fed decides to take back that policy by raising rates, it will need to explain itself, and Mr Poole said the semi-annual testimony of Chairman Ben Bernanke, expected in the middle of next month, would be a logical opportunity.

Mr Bernanke may be under pressure to move in that direction from hawks on the policy-setting Federal Open Market Committee.

There was one dissent on Wednesday, by Dallas Fed President Richard Fisher, who wanted a rate hike. Mr Fisher had also dissented at the Fed's April meeting. Philadelphia Fed chief Charles Plosser, who had dissented at the two previous meetings, voted with the rest of the committee.

Mr Poole said he would have done the same thing in Mr Plosser's position, because to vote for a rate hike on Wednesday risked confusing markets and doing more harm than good. But that did not mean that Fed hawks have gone away, he cautioned.

'I wish they had not gone as far as 2 per cent. But those are all judgement calls. ... They are not capricious. They are all defensible,' he said. -- REUTERS