News What is wrong with the US economy?

[Art]

A declining economy historically tends to drag energy prices down.

Do you have a source to support this contention? The last major recession in the 70's saw energy prices quadruple.

 

[Jimmy Snyder]

Also, the value of my IRA (heavily invested in stock-based funds) has dropped by almost 9% in the first quarter of this year, and that's not going to turn around any time soon - I'll just have to ride that out.

What are you complaining about? The S & P average dropped 9.9% over the same period. And who ever heard of a shopper complaining that the price of eggs had gone down?

 

[Astronuc]

A declining economy historically tends to drag energy prices down.

But the US economy is going down, and other economies in India, China and a few others have been growing. The price of oil is set globally, not on the US economy. On the other hand, a downturn in the US economy will slow down the other economies because the US buys from those other markets. Unfortunately, the US is buying way more than it is selling, and is borrowing way too much, hence the problem.

 

[quadraphonics]

The price of oil is set globally, not on the US economy.

True; however, the United States accounts for a huge portion of demand for oil. That demand from China and India might continue to grow at, say, 10% a year is not actually that impressive when you consider that their total consumption is less than half of what America buys. I.e., a 5% decline in American demand for oil would cancel out all of the growth in oil demand coming from China and India that year.

Unfortunately, the US is buying way more than it is selling, and is borrowing way too much, hence the problem.

The problem is related to unsound risk management on Wall Street (and Main Street), not the trade deficit. Anyway, the declining dollar is rapidly eating into the trade deficit. The growth of the trade deficit reversed dramatically last year, and seems set to take a plunge this year, with the dollar tanking. China's soft peg will dampen its decline, but the overall trend is still clear. The trade deficit with Europe, for example, has already pretty much disappeared.

 

[Astronuc]

The problem is related to unsound risk management on Wall Street (and Main Street), not the trade deficit. Anyway, the declining dollar is rapidly eating into the trade deficit. The growth of the trade deficit reversed dramatically last year, and seems set to take a plunge this year, with the dollar tanking. China's soft peg will dampen its decline, but the overall trend is still clear. The trade deficit with Europe, for example, has already pretty much disappeared.

The government report - http://www.census.gov/indicator/www/ustrade.html - would apparently contradict those statements.

The goods deficit with the European Union increased from $6.1 billion in January to $6.9 billion in February. Exports increased $2.5 billion (primarily civilian aircraft) to $23.8 billion, while imports increased $3.3 billion (primarily pharmaceutical preparations and passenger cars) to $30.6 billion.

http://www.census.gov/foreign-trade/statistics/historical/gandsbal.pdf

US Total Trade Balance
. Yr . . millions of dollars

1994    -98,493
1995    -96,384
1996   -104,065
1997   -108,273
1998   -166,140
1999   -265,090
2000   -379,835
2001   -365,126
2002   -423,725
2003   -496,915
2004   -612,092
2005   -714,371
2006   -758,522
2007   -711,399

http://www.census.gov/foreign-trade/statistics/historical/index.html

 

[quadraphonics]

The government report - http://www.census.gov/indicator/www/ustrade.html - would apparently contradict those statements.

I don't agree. But, even if you don't think that the decrease in the trade deficit over the past couple of years is significant, that site makes it very clear that the size of the deficit compared to the volume of trade certainly is diminishing, which is arguably more important than the absolute size of the deficit. Similarly, the size of the trade deficit relative to GDP is declining.

US Total Trade Balance
. Yr . . millions of dollars

1994    -98,493
1995    -96,384
1996   -104,065
1997   -108,273
1998   -166,140
1999   -265,090
2000   -379,835
2001   -365,126
2002   -423,725
2003   -496,915
2004   -612,092
2005   -714,371
2006   -758,522
2007   -711,399

Right, you can see how it was increasing rapidly from 1995 through 2006, and then dramatically reversed in 2007. Expect this to continue in 2008. It's still a long way from 0, but the decade-long trend of increasing trade deficits is over with.

Also, as to the trade with Europe, I wouldn't get too alarmed about month-to-month changes, as the trade deficit tends to be rather volatile. It will be interesting to see how it goes over the next few months though, as the dollar keeps hitting record lows against the Euro.

 

[loseyourname]

The trade deficit trend is reversing at least in part because a weakening dollar makes it more cost effective to be in the export business than the import business. I'm not sure that's really a very good thing for our economy all told, though it's been huge for the export industry, which is about the only thing still booming these days along with oil and gas.

 

[Astronuc]

Oil Has Two Potential Futures, Shell Strategist Says
http://www.npr.org/templates/story/story.php?storyId=89831088

Morning Edition, April 22, 2008 · As oil prices hit $117 a barrel this month, a forecast from Shell Oil outlines two very different possibilities for the future of the world's energy supply. Looking out to the year 2050, Shell strategist Jeremy Bentham says demand will go up, while oil supplies will be harder to find. But how nations and companies react is harder to predict.

"We anticipate that you'll begin to see a plateauing of easily accessible conventional oil and gas around about the 2015, 2020 type of period," Bentham tells Steve Inskeep.

Bentham outlines two outcomes — one a "scramble" and the other a "blueprint" scenario — for addressing energy needs.

In the scramble scenario, he says, "a focus on supply security drives a lot of decision-making." For example, China is worried about its future supply of oil, so it decides that it needs to be friendly with Iran. Or the U.S., worried about its supply of oil, holds intensive talks with Saudi Arabia.

. . . .

Oil Has Two Potential Futures, Shell Strategist Says
http://www.nytimes.com/2008/04/21/opinion/21krugman.html

Nine years ago The Economist ran a big story on oil, which was then selling for $10 a barrel. The magazine warned that this might not last. Instead, it suggested, oil might well fall to $5 a barrel.

In any case, The Economist asserted, the world faced “the prospect of cheap, plentiful oil for the foreseeable future.”

Last week, oil hit $117.

It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

How you answer this question depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.

The first is that it’s mainly speculation — that investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — that we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.

There are some very smart people — not least, George Soros — who believe that we’re in a commodities bubble (although Mr. Soros says that the bubble is still in its “growth phase”). My problem with this view, however, is this: Where are the inventories? . . . .

The US seems to be in a perfect storm - highly leveraged, importing more than exporting, declining wages and loss of jobs, loss of wealth for many (based on declining home prices, defaults and foreclosures), tight credit, declining value on the currency . . . .

And it could get worse.

 

[russ_watters]

The US seems to be in a perfect storm - highly leveraged, importing more than exporting, declining wages and loss of jobs, loss of wealth for many (based on declining home prices, defaults and foreclosures), tight credit, declining value on the currency . . . .

And it could get worse.

Except for the "declining wages" part (it hasn't happened yet, but probably will)... we're in a recession. That's what recessions look like. With the severity of the housing crisis/credit crunch, it is truly amazing how soft this recession apparently is. It is a testament to the fundamental strength of the economy.

 

[Poop-Loops]

No, it's a testament to how strongly people are glued to their TV's. They don't notice what is going on around them.

 

[drankin]

I'm just lucky to be working in industries that doesn't seemed to be influenced by all of this. Machine shops are booked out for months everywhere. What's amazing is that Canadian manufacturers/machine shops are under bidding US shops. They must be buying materials from the US cheap because of the dollar, and selling it back to us cheap and still able to make a profit. I hear more recession than I see.

 

[Astronuc]

Workers Get Fewer Hours, Deepening the Downturn
http://www.nytimes.com/2008/04/18/business/18hours.html

Not long ago, overtime was a regular feature at the Ludowici Roof Tile factory in eastern Ohio. Not anymore. With orders scarce and crates of unsold tiles piling up across the yard, the company has slowed production and cut working hours, sowing worry and thrift among its workers.

“We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”

Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.

While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

. . . .

Parts of the country, e.g. Ohio and surrounding areas, have been hit harder than the rest.

 

[russ_watters]

No, it's a testament to how strongly people are glued to their TV's. They don't notice what is going on around them.

What does it have to do with what people notice? We're talking about statistics and reality, not perception. Or are we talking about perception? People seeing doom and gloom where none exists?

By and large, economists are *not* predicting a major recession - only pessimists and democrats hoping for an edge in November.

 

[russ_watters]

I'm just lucky to be working in industries that doesn't seemed to be influenced by all of this.

But that's exactly it: so far, the economic issues have not spread much beyond the financial and housing sectors. The rest of the economy is doing fine.

 

[Astronuc]

But that's exactly it: so far, the economic issues have not spread much beyond the financial and housing sectors. The rest of the economy is doing fine.

Umm, the airlines are still losing money, and three carriers filed bankruptcy in the last several weeks.

Delta, Northwest losses widen on noncash charges

The US automobile companies aren't doing so well, and the manufacturing sector is rather weak.

Retailers are closing hundreds of stores and laying off people.


Of course, the US government is hiring people, but that's all on borrowed money.

 

[Jimmy Snyder]

Of course, the US government is hiring people, but that's all on borrowed money.

There is a huge difference between economy and finance.

 

[drankin]

If we can get this military tanker deal put back with Boeing rather than overseas, that would be a step in the right direction. I heard a figure of about 100,000 jobs will be directly and indirectly affected. It was coined a type of "stimulus" deal.

 

[mheslep]

If we can get this military tanker deal put back with Boeing rather than overseas, that would be a step in the right direction. I heard a figure of about 100,000 jobs will be directly and indirectly affected. It was coined a type of "stimulus" deal.

Well I don't care to pay for it. Boeing thought that being the home team meant they could deliver crap for a ton of money. Yes they can make better planes than airbus but they didn't bother this time. Jobs will be fewer, but only some 40k fewer as many of them will still be US based via Northrup Grumman in the aircraft, engines are still GE US.

 

[mheslep]

Of course, the US government is hiring people, but that's all on borrowed money.

If the deficit is 20% then surely hiring is on only 20% borrowed money.

 

[mheslep]

Umm, the airlines are still losing money, and three carriers filed bankruptcy in the last several weeks.

Delta, Northwest losses widen on noncash charges

No, as a whole they are not losing money. Industry profits are currently $4.5B which are down a couple B from last year and there have been bankruptcies but the industry as a whole is not losing money.
http://www.forbes.com/2008/04/01/air-transport-closer-markets-equity-cx_mp_0401markets46.html
Certainly one of the reasons air carriers have had a hard time making money is that there are far too many players; time for some of them to go.

 

[quadraphonics]

If we can get this military tanker deal put back with Boeing rather than overseas, that would be a step in the right direction. I heard a figure of about 100,000 jobs will be directly and indirectly affected. It was coined a type of "stimulus" deal.

I wouldn't get to worked up about aircraft contracts going "overseas" at the moment, because the weak dollar has been eating Airbus alive. So much so that they're shifting a lot of their production to (drumroll please...) the United States.

 

[russ_watters]

Umm, the airlines are still losing money, and three carriers filed bankruptcy in the last several weeks.

Ok, the big airlines are perpetual losers as are the car companies. Maybe it would have been better if I had said the rest of the economy is humming along as normal.

 

[Astronuc]

No, as a whole they are not losing money. Industry profits are currently $4.5B which are down a couple B from last year and there have been bankruptcies but the industry as a whole is not losing money.
http://www.forbes.com/2008/04/01/air-transport-closer-markets-equity-cx_mp_0401markets46.html
Certainly one of the reasons air carriers have had a hard time making money is that there are far too many players; time for some of them to go.

From the link -

Airline shares took off Tuesday, fueled by falling oil prices, but the industry's profit expectations continued to be weighed down by tepid economic growth and fuel costs that remain at historically high levels.

That was then - this is now. Oil prices have surged in the past three weeks.

The International Air Transport Association chopped its industry profit expectations to $4.5 billion on Tuesday from December's forecast of $5.0 billion and September's $7.8 billion.

Expectations - not actual profit. US Air also announced a loss. Most of Delta's loss was a writedown on reduced capitalization. "Excluding about $6.1 billion in one-time charges, Delta said it lost $274 million".

At Northwest, the Minneapolis, Minn.-based carrier said its loss first-quarter loss widened to $4.14 billion, or $15.78 a share, from $292 million, or $3.34 a share, a year ago. Revenue increased 8.8% to $3.13 billion.
Excluding a $3.9 billion, noncash goodwill impairment charge the carrier said it lost 26 cents a share, in line with analysts' mean expectation.

http://www.marketwatch.com/news/story/us-airways-swings-1st-quarter/story.aspx?guid=%7B18EF2E45%2D63BA%2D442C%2D823F%2D1154D2ABCEA0%7D&dist=msr_5

AMR swings to first-quarter loss

UAL, Jet Blue get slammed by fuel costs
Carriers report quarterly losses, UAL shares drop 35%

UAL the Chicago-based parent of United Airlines, said its quarterly loss widened to $537 million, or $4.45 a share, from $152 million, or $1.32 a share, a year earlier.

But watch out!

Gasoline could hit $7 a gallon in four years: CIBC
Crude predicted to top $200 by 2012 on tight supplies, pushing gas higher

 

[Astronuc]

Some actual good news - Ford declared $100 million profit - on overseas sales.

But let's put that in perspective -

Quarterly revenue fell to $39.4 billion from $43 billion a year ago.

$100 million on revenue of $39.4 billion. What's wrong with this business model? What is the ROI?

 

[Jimmy Snyder]

$100 million on revenue of $39.4 billion. What's wrong with this business model? What is the ROI?

The ratio of profit to revenue is called margin, ROI (return on investment) is different. It is the ratio of profit to the amount invested. I don't think companies report it. I think it is applied to the ratio of price appreciation and dividends to the purchase price of a share of stock. In other words, it is a matter for the stock holder, not the company.

When profit is rising while revenue is falling, it can mean a lot of different things. It could mean that they are cutting costs faster than they are losing sales. Lower sales could mean a problem with the business plan, but not necessarily. For instance, if customers started buying smaller cars, it would cause a decrease in revenue. This could ruin a company if it bet heavily that things would go the opposite way. But if profits rise, then probably that is not the way they bet, so perhaps we shouldn't blame the business plan.

This would be a good time for those who advocate a greener future to access what they are willing to give up to get it.

 

[mheslep]

From the link -
That was then - this is now. Oil prices have surged in the past three weeks.

Oil was back down today $4 to $116 based on a big spike in the dollar and expectations that the Fed is done cutting rates, so we will see. If the Fed does not issue another rate cut look for Oil to drop ~10%.

Expectations - not actual profit.

Yes agreed, I see the Forbes airline piece was 4/1 before these Q1 reports started coming out this week showing the losses (not Southwest, they made money) driven by fuel prices. I have to say that surprised me as the airlines usually insulate themselves from price swings by buying futures contracts on fuel. Delta famously failed to do that awhile back which is what put them under.

From WSJ:
Southwest made $25M in Q1 '08.

The technology sector is doing ok:
Company / Q1 Earnings:
----------------------------------
ATT 2.8B (up from Q4)
Intel $1.4B
GE $4.2B, down from $6.4B Q4
Google $1.3B, up
IBM $2.2B, same as Q3
Microsoft $4.1B, up

Pharmaceuticals ok:
Pfizer $2.2B, same
Merck $3.2B

Johnson and Johnson $3.6B, up

And of course Exxon: ~$12B greatest all time quarterly record, any public co. I hear they're hiring

 

[mheslep]

But watch out!

Gasoline could hit $7 a gallon in four years: CIBC
Crude predicted to top $200 by 2012 on tight supplies, pushing gas higher

Four years out, we will see. But this year:

"S&P sees oil prices easing by year-end
Crude may end up at $91, but margin of error is wide, analysts say"
http://www.marketwatch.com/News/Sto...x?guid={BA5DA189-56FA-47D0-A468-71F9E9E5806E}

 

[turbo]

Many states appear to be in recession - from AP:
http://news.yahoo.com/s/ap/20080425/ap_on_bi_ge/state_finances;_ylt=AqQNyBtWLUJSLE8mxYHhp.Ws0NUE

With the exception of CT, all the New England states are in trouble, with revenue gaps that may be hard to close. Maine is considering increasing taxes on alcoholic beverages, soft drinks, etc, to increase revenue. With the housing slump and the weak job market, fewer people are buying furniture, appliances, fixtures, and related items. People are also holding onto their vehicles longer. This results in decreasing tax revenue from sales tax (levied on almost every retail transaction) and excise tax (levied on vehicles at the time of their yearly registration). Since excise tax is based on the value of the vehicle, the longer people keep their vehicles, the more they depreciate, and the lower their yearly taxes.

Maine also collects income taxes and that revenue stream is being reduced by the failing job market. Fuel tax revenue is also pressured by the high cost of gasoline, which is causing people to curtail driving when possible.

 

[Astronuc]

Four years out, we will see. But this year:

"S&P sees oil prices easing by year-end
Crude may end up at $91, but margin of error is wide, analysts say"
http://www.marketwatch.com/News/Sto...x?guid={BA5DA189-56FA-47D0-A468-71F9E9E5806E}

Analysts are about as correct as the weatherman. It's hard to say where oil prices are going. There is certainly a lot of pressure to push oil prices higher - more profit. But higher prices would seem to dampen demand - and I suppose that if unemployment rises, there will be a significant drop in demand.

But the US, which represent ~5% of the world's population consumes about 26% of the energy. That's not sustainable in the long term - especially considering the growing anti-US sentiment in many of the energy producing states - and increased competition from growing markets.

 

[Vanadium 50]

Analysts are about as correct as the weatherman. It's hard to say where oil prices are going. There is certainly a lot of pressure to push oil prices higher - more profit. But higher prices would seem to dampen demand - and I suppose that if unemployment rises, there will be a significant drop in demand.

There are many factors that affect the price of oil other than demand, though. One is supply - oil that is uneconomical to extract when the price is $50/bbl may look a lot better at $100/bbl. So as the price goes up, so does the supply.

Additionally, the fall of the dollar means that the price of the oil in dollars will naturally rise. While the above feedback loop was negative, this one is positive (at least for a while): dollar falls, energy prices rise, US companies become less profitable, dollar falls further. Eventually exports grow and stop the dollar's fall, but there are economic factors at play that have nothing to do with supply and demand.

Finally, oil is almost a currency. (I will avoid making any puns on liquidity). If the dollar is falling, it makes sense to put your dollars into oil instead. This drives up the price, at least temporarily.