[Pen-l] Doom and gloom

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/19/AR2008111900943.html
Stocks Slump As Signs Point To Harder Times
Key Indicators Suggest Deep Recession

By Neil Irwin and David Cho
Washington Post Staff Writers
Thursday, November 20, 2008; A01

Businesses cut prices at a record rate and builders started fewer new 
homes last month than anytime on record, according to new government 
data, as the outlook for the economy continues to dim.

The data helped spur another terrible day for the stock market, as did a 
projection of more hard times ahead by leaders of the Federal Reserve. A 
serious recession now appears all but assured.

The stock market fell another 5 percent, as measured by the Dow Jones 
industrial average, which closed below 8,000 for the first time in this 
bear market. New-home starts in October were the lowest since at least 
1959, when the government began keeping data. The consumer price index 
plummeted by the most since that series of monthly data was started in 
1947, as the economy slowed so abruptly that companies had to slash 
prices to sell products.

And Federal Reserve leaders released projections indicating they expect 
the economy to worsen significantly in the coming year. The most 
pessimistic of 17 Fed officials expects joblessness to rise to 8 percent 
at the end of 2009, which would be the highest in a quarter-century.

"We're in the deep portion of the economic trough," said Richard 
Yamarone, chief economist of Argus Research, explaining yesterday's 
market sell-off. "So you have to expect a certain degree of negative 
sentiment, you almost have to expect doom and gloom at this point."

The consumer price index, a broad measure of inflation facing U.S. 
households, fell 1 percent in October, driven by an 8.6 percent decline 
in the price of energy. But the falling prices were considerably broader 
than that; excluding food and energy, which are volatile, prices fell 
0.1 percent, the first monthly decline in that "core" price index since 
1982.

Clothing prices fell 1 percent, for example, and the price of used cars 
and trucks was off 2.4 percent. More broadly, economists said, 
businesses are losing any ability to set prices because demand for their 
goods has dried up.

"It's not simply that they don't have pricing power," said Joel Naroff, 
president of Naroff Economic Advisors. "It's that they can't sell what 
they have. If you have any inventory, you have to make sure it moves, 
and that means cutting prices."

The silver lining of the negative inflation numbers is that dropping 
prices make it easier for people -- at least those who do not lose their 
jobs in the downturn -- to afford the goods and services they buy.

Similarly, weak construction numbers -- housing starts fell 4.5 percent 
and new building permits issued fell 12 percent in October, the Commerce 
Department said -- also contain benefits for the economy in the longer 
run. The fewer new homes built, the sooner the economy can work through 
an oversupply of housing.

Just this summer, many Fed officials and other economists viewed spiking 
inflation as among their foremost concerns. That appears to have 
changed. Besides raising their expectations for unemployment, the 17 top 
Fed leaders (12 regional bank presidents and five serving governors) cut 
their predictions of inflation in 2009.

Minutes released yesterday of the late-October meeting of the Fed's 
policymaking committee gave strong signals that the central bank could 
cut interest rates again at its December meeting, following two rate 
cuts in October. Rate cuts indicate greater concern about a slowing 
economy than about the risk of higher prices.

The policymaking committee "agreed that it would take whatever steps 
were necessary to support the recovery of the economy," according to the 
minutes.

The dropping prices even raise the possibility of deflation, or a 
sustained fall in price levels that can create a dangerous 
self-reinforcing cycle, although economists generally think it unlikely 
the United States will enter such a cycle.

"There is a risk out there" of deflation, Federal Reserve vice chairman 
Donald Kohn said in a conference yesterday at the Cato Institute. "But 
it's still small in my mind."

There was no single reason for yesterday's stock market decline, which 
accelerated in the final hour of the trading day. Turmoil in the 
commercial real estate market deepened as securities backed by loans on 
commercial properties such as office buildings fell in value. Shares of 
financial companies, especially Citigroup, and real estate investment 
trusts fell sharply.

But investors were also spooked by the Fed's weak projections and a 
general sense of anxiety.

"It's a tough environment, you've got layoffs, you've got bad news, 
people are worried about banks," said Andrew Brooks, head equity trader 
at T. Rowe Price. "It's a nervous, anxious market."

Investors sold off corporate bonds with lower credit ratings, concerned 
that a rash of retailers, manufacturers and other companies will close 
their doors and default on their debt in the coming months.

Moody's has been predicting a sharp rise in failures among firms that 
have lower-rated -- or "junk" -- credit ratings. In a report last week, 
it predicted a "deep and protracted" recession would force more than one 
in 10 of these companies to go under. The majority of U.S. firms have 
these credit ratings.

The nerves in the bond markets are making it prohibitively expensive for 
many companies to raise money. And without a healthy bond market, a 
swath of economic activity is eliminated. Firms stop borrowing to buy 
construction equipment to put up buildings, acquire land for expanding 
restaurant chains or raise money to get through a cash crunch.

Because corporate junk bonds are more risky to own, investors often 
demand a higher yield to buy them. Yesterday, these yields, which move 
in the opposite direction of bond prices, rose above 20 percent for the 
first time since 1990.

The squeeze on companies eventually will cause some of them to file for 
bankruptcy protection. On Monday, Moody's reported that the number of 
companies in danger of running out of cash reached the highest level 
since 2002.
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