Economy is Slowing

[kmguru]

Incase you did not know that....

NEW YORK - News flash from the Federal Reserve: The economy is slowing.

Though the Fed was dead last to report the news, it was the Fed talking, which caused a disproportionate reaction on Wall Street. The Standard & Poor's 500 index slipped 20.87, or 1.7%, to 1,183.53. The Nasdaq, always more volatile, fell further by 61 to 1,966, a 3% loss and its weakest finish since July 24. The Standard & Poor's 500 index slipped 21, or 1.7%, to 1,184.

The Fed found that the weakness in manufacturing was spreading to other sectors. This observation led some analysts to conclude that the worst of the recent slowdown may not be over. Data on productivity, which increased, and employment, which held steady, issued within the last week tended to point to an opposite conclusion.

Many investors were particularly worried about indications of flagging consumer spending--indications again contradicted by reports from other government departments. The strength of consumer spending has been credited with keeping the U.S. economy from entering a recession.

"Retail sales were generally sluggish and frequently below expectations, despite substantial discounting on a wide range of consumer goods," the Fed said.

Particularly bleak anecdotes concerned factory activity, which has borne the brunt of the economic slowdown this year. The manufacturing sector lost 837,000 jobs the last 12 months. So the slowdown was widely known before the Fed issued its report.

"Reports of reduced work hours, lost overtime, forced furloughs, planned shutdowns and layoffs were pervasive," the report said. It noted specific weakness in clothing, computers, semiconductors, steel and telecommunications gear production.

Other highlights: "Agricultural producers continued to struggle against low prices, weak exports, higher energy costs, and the weather." The weather! But didn't we all know that farmers never catch a break?

"Fuel and energy prices fell in June and July in most Districts, lessening the burden on businesses and easing pressure on consumer budgets. Lower energy costs also contributed to price declines for a number of manufactured goods." Does this mean the energy crisis, much-feared just a few months ago is officially--or at least anecdotally-- over?

And if the energy crisis is over, should anyone be surprised if the overall slowdown ends soon also?

 

[Captain Canada]

We've had a similar debate before.

Most anlysts are now seeing rising US energy demand through July and August (despite the higher than usual energy prices), so it unfortunately looks like that OPEC quota cut may be coming at just the wrong time. With the US still blocking Iraqi oil spares contracts, there's a possibility that Iraqi production will also fall. The winter could yet be rough (no one really knows).

 

[kmguru]

You are right Captain Canada. What people are missing the most is , we had an economic boom based on Information Economy. Now that all the telecom companies are in trouble, the whole economy is faltering. There is no end in sight. My previous assesment is somewhat wrong, that is if all price goes down, economy will pick up. There is a structural problem with Telcos and without respective government intervention - we are stuck in this for another year.

 

[Captain Canada]

Yes kmguru, I would agree with that assesment. The question is how to get out of it. Regretably it looks like the US slowdown is going global, so overseas demand will be unlikely to restart the 'virtuous growth cycle'. Telcos in Europe are in bad shape (in the UK particularly) and job losses are getting worse.

There seems no alternative industry to drive the economy, so it's hard to see where the recovery will start. I don't think consumer purchasing is the main problem (it goes on and on - funded largely by credit), so Dubya's tax cut is probably not going to help. There is the old pump prime approach, but that is ruled out with Bush in the White House. Where will the recovery come from?

 

[kmguru]

You hit the nail on the head. It is a complex problem. Here is why.

The new economy grew 4% plus in the last decade in US due to that Information Age. Suddenly it went to a screeching halt due to certain structural problems. It so happens that the telecom industry is the key now , where as the computer industry was the key in early 90s. It is like you have 10 million people. Each one wants a Tele. So you setup a company to built 2 million Tele a year. After 5 years, what do you do? Yes you can sell a few because someone wants two. But it becomes a point of diminishing return even though you could come up with purple or orange ones. If you do it over 20 years, people want a new one but when the time frame is reduced, they may not.

Anyway to fix the problem, our FCC chairman Mr. Powell needs to get involved. But he said , he will not. The industry needs to come together to develop a method to solve this crisis.

We can fall back to the old economy, but that will be a pain. That means negative growth and unemployment, salary cuts and so on. I am in the middle of it. I sent out bids for a client of mine to the major Telecoms: Cable&Wireless, Worldcom, Verio/NTT, and Broadwing. I got proposal from everybody except Cable&Wireless. I also saw that they are hungry but do not know how to solve the customer's problem.

My conclusion is same as the upcoming issue of Businessweek, Economy will move at a snails pace for quite a while. There is a way to speed it up, but it needs a group effort including government support which is unlikely.