Recession Risk Rises as Consumers Feel Credit Tighten
By Joe Richter and Rich Miller
Sept. 4 (Bloomberg) -- The pain from higher borrowing costs may be spreading as consumers and businesses follow investors in shying away from risk, increasing the odds of a recession.
``While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
Economists at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among those lowering economic forecasts as the rising cost of credit prolongs the worst housing recession in 16 years. Now, two areas of the economy that have held up well so far, jobs and consumer spending, no longer appear immune to the fallout.
Already, the financial turmoil has put a dent in consumer and business confidence, according to surveys taken in August. Wal-Mart Stores Inc., the world's largest retailer, lowered its earnings forecast for this year. Financial-services companies including Atlanta-based SunTrust Banks Inc. announced plans to eliminate thousands of jobs.
Though reports show a strong start to this year's third quarter, economists will be watching this week for U.S. auto sales and August employment to see whether spending and the job market might follow housing into a slump.
`Fear in the Markets'
``We're taking the pulse of the economy a little more frequently,'' says Jonathan Basile, an economist at Credit Suisse Holdings in New York. ``If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets.''
Federal Reserve Chairman Ben S. Bernanke is under pressure to cut interest rates this month after the central bank said Aug. 17 that ``downside risks to growth have increased appreciably.'' Futures trading shows investors are betting the Fed will cut its benchmark rate at least a quarter percentage point, to 5 percent, at its Sept. 18 policy meeting.
The Fed ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' Bernanke said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, on Aug. 31.
More Pessimistic
Confidence is critical at key junctures in the economy. If consumers and companies turn more pessimistic about the outlook and cut back on their spending, such gloominess can prove to be self-fulfilling, triggering a recession.
A sudden drop in consumer confidence at the end of 2000, coupled with a contraction in manufacturing and a two-year-low in motor-vehicle sales, helped set the stage for the last recession, which began in March 2001.
The omens today aren't particularly promising. An index of global business confidence compiled by Moody's Economy.com in West Chester, Pennsylvania, fell in late August to its lowest level since the middle of the U.S.-led invasion of Iraq in 2003.
Spending on U.S. construction projects unexpectedly fell in July by the most since January, a government report today showed.
Consumers are also showing signs of being spooked by the turmoil in financial markets. U.S. consumer confidence tumbled last month by the most since Hurricane Katrina struck two years ago, according to the Conference Board, a private research group in New York.
`Significant Risk'
``I think there's a significant risk of recession now,'' says Martin Feldstein, president of the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end. ``The consumer will be spending less. The most recent consumer confidence numbers are down. That's going to be reinforced by everything happening in the housing market.''
Americans have ``pulled back on buying big-ticket items; and pulling back means that unless there is a rate cut, you will have a recession,'' Michael Jackson, chief executive officer of AutoNation Inc., said in an interview Aug. 29. AutoNation, based in Fort Lauderdale, Florida, is the largest U.S. auto retailer.
The pace of car and truck sales in the U.S. has dropped for seven consecutive months, the biggest string of declines in at least 31 years, according to data compiled by Bloomberg. Economists forecast little change for August when car makers report sales figures today.
Incentives
General Motors Corp., the biggest U.S. automaker, raised incentives on pickup trucks and sport-utility vehicles in August after its U.S. sales dropped 22 percent in July. The Detroit- based automaker also slowed production at six North American plants that assemble these vehicles.
``U.S. consumers continue to be under difficult pressure economically,'' Wal-Mart Chief Executive Officer H. Lee Scott said on Aug. 14. The Bentonville, Arkansas-based company blamed the housing slump and high gasoline prices when it reduced its profit forecast.
The pressure on consumers may increase if jobs become harder to get. First-time applications for jobless benefits have risen for five straight weeks, the longest streak since May last year.
``Employers are turning more cautious about taking on workers,'' says Steven Director, a professor at the School of Management and Labor Relations at Rutgers University in New Brunswick, New Jersey. ``The jobs market is softening.''
Payroll growth may slow in September to 50,000 jobs from more than 100,000 in August as businesses pull back on hiring, according to Kurt Karl, chief U.S. economist at Swiss Reinsurance, the world's largest reinsurer, in New York.
Rising Incomes
Still, Karl, who estimates the chances of a recession at about 35 percent, says the effect of the credit crunch on jobs will be temporary. He expects that consumers are more likely to pause than retreat for as long as incomes continue to rise. Earnings increased 3.9 percent in July from a year earlier, according to the Labor Department.
The economy chalked up its highest growth rate in more than a year during the second quarter, and there is evidence the strength carried over into the third quarter. Retail sales, durable-goods orders and new-home sales all surpassed economists' estimates in July. Those figures show the economy was strong before credit markets seized up in August.
More recent indicators ``are going to be looming larger as people try to get a handle on what's happening in the financial markets,'' says Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.
The expansion may hinge on how business reacts to the curtailment of credit, economists say. U.S. business capital spending helped sustain growth in the second quarter.
A report today from the Tempe, Arizona-based Institute for Supply Management showed manufacturing cooled in August as factories trimmed orders.
``Business spending is the big concern,'' Swiss Reinsurance's Karl says. ``If that tanks, we could be heading for a recession.''
By Joe Richter and Rich Miller
Sept. 4 (Bloomberg) -- The pain from higher borrowing costs may be spreading as consumers and businesses follow investors in shying away from risk, increasing the odds of a recession.
``While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
Economists at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among those lowering economic forecasts as the rising cost of credit prolongs the worst housing recession in 16 years. Now, two areas of the economy that have held up well so far, jobs and consumer spending, no longer appear immune to the fallout.
Already, the financial turmoil has put a dent in consumer and business confidence, according to surveys taken in August. Wal-Mart Stores Inc., the world's largest retailer, lowered its earnings forecast for this year. Financial-services companies including Atlanta-based SunTrust Banks Inc. announced plans to eliminate thousands of jobs.
Though reports show a strong start to this year's third quarter, economists will be watching this week for U.S. auto sales and August employment to see whether spending and the job market might follow housing into a slump.
`Fear in the Markets'
``We're taking the pulse of the economy a little more frequently,'' says Jonathan Basile, an economist at Credit Suisse Holdings in New York. ``If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets.''
Federal Reserve Chairman Ben S. Bernanke is under pressure to cut interest rates this month after the central bank said Aug. 17 that ``downside risks to growth have increased appreciably.'' Futures trading shows investors are betting the Fed will cut its benchmark rate at least a quarter percentage point, to 5 percent, at its Sept. 18 policy meeting.
The Fed ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' Bernanke said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, on Aug. 31.
More Pessimistic
Confidence is critical at key junctures in the economy. If consumers and companies turn more pessimistic about the outlook and cut back on their spending, such gloominess can prove to be self-fulfilling, triggering a recession.
A sudden drop in consumer confidence at the end of 2000, coupled with a contraction in manufacturing and a two-year-low in motor-vehicle sales, helped set the stage for the last recession, which began in March 2001.
The omens today aren't particularly promising. An index of global business confidence compiled by Moody's Economy.com in West Chester, Pennsylvania, fell in late August to its lowest level since the middle of the U.S.-led invasion of Iraq in 2003.
Spending on U.S. construction projects unexpectedly fell in July by the most since January, a government report today showed.
Consumers are also showing signs of being spooked by the turmoil in financial markets. U.S. consumer confidence tumbled last month by the most since Hurricane Katrina struck two years ago, according to the Conference Board, a private research group in New York.
`Significant Risk'
``I think there's a significant risk of recession now,'' says Martin Feldstein, president of the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end. ``The consumer will be spending less. The most recent consumer confidence numbers are down. That's going to be reinforced by everything happening in the housing market.''
Americans have ``pulled back on buying big-ticket items; and pulling back means that unless there is a rate cut, you will have a recession,'' Michael Jackson, chief executive officer of AutoNation Inc., said in an interview Aug. 29. AutoNation, based in Fort Lauderdale, Florida, is the largest U.S. auto retailer.
The pace of car and truck sales in the U.S. has dropped for seven consecutive months, the biggest string of declines in at least 31 years, according to data compiled by Bloomberg. Economists forecast little change for August when car makers report sales figures today.
Incentives
General Motors Corp., the biggest U.S. automaker, raised incentives on pickup trucks and sport-utility vehicles in August after its U.S. sales dropped 22 percent in July. The Detroit- based automaker also slowed production at six North American plants that assemble these vehicles.
``U.S. consumers continue to be under difficult pressure economically,'' Wal-Mart Chief Executive Officer H. Lee Scott said on Aug. 14. The Bentonville, Arkansas-based company blamed the housing slump and high gasoline prices when it reduced its profit forecast.
The pressure on consumers may increase if jobs become harder to get. First-time applications for jobless benefits have risen for five straight weeks, the longest streak since May last year.
``Employers are turning more cautious about taking on workers,'' says Steven Director, a professor at the School of Management and Labor Relations at Rutgers University in New Brunswick, New Jersey. ``The jobs market is softening.''
Payroll growth may slow in September to 50,000 jobs from more than 100,000 in August as businesses pull back on hiring, according to Kurt Karl, chief U.S. economist at Swiss Reinsurance, the world's largest reinsurer, in New York.
Rising Incomes
Still, Karl, who estimates the chances of a recession at about 35 percent, says the effect of the credit crunch on jobs will be temporary. He expects that consumers are more likely to pause than retreat for as long as incomes continue to rise. Earnings increased 3.9 percent in July from a year earlier, according to the Labor Department.
The economy chalked up its highest growth rate in more than a year during the second quarter, and there is evidence the strength carried over into the third quarter. Retail sales, durable-goods orders and new-home sales all surpassed economists' estimates in July. Those figures show the economy was strong before credit markets seized up in August.
More recent indicators ``are going to be looming larger as people try to get a handle on what's happening in the financial markets,'' says Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.
The expansion may hinge on how business reacts to the curtailment of credit, economists say. U.S. business capital spending helped sustain growth in the second quarter.
A report today from the Tempe, Arizona-based Institute for Supply Management showed manufacturing cooled in August as factories trimmed orders.
``Business spending is the big concern,'' Swiss Reinsurance's Karl says. ``If that tanks, we could be heading for a recession.''
No comments:
Post a Comment