Caught in the Financial Downdraft
Friday, March 6, 2009
President Obama and his aides this week were selling hope. The markets aren't buying.
Two days after the administration sought to restore calm to the markets, major indexes yesterday plunged more than 4 percent on a cascade of bad economic and corporate news.
General Motors' auditors raised "substantial doubt" about the automaker's ability to survive on its own, pushing the company's shares down. Moody's Investors Service said it might downgrade the long-term debt rating of Wells Fargo, causing investors to unload shares of the bank. And shares of Citigroup -- one of the biggest holdings in the government's bulging portfolio -- briefly traded below a dollar before bouncing back across that threshold later in the day.
The downdraft was global, with every major world market down steeply. Trying to contain the damage of this recession, the European Central Bank cut interest rates, as did the Bank of England, which announced that it would follow in the steps of the Federal Reserve by buying assets to push down a broader range of rates. Lending markets yesterday were increasingly strained, with the rates banks charge to lend to each other inching upward. The Dow Jones industrial average finished 4.1 percent lower yesterday, at 6594.44, its lowest close in 12 years. The blue-chip index has lost 20 percent of its value in just under a month.
Obama on Wednesday cautioned against paying too much attention to markets and even said "buying stocks is a potentially good deal" because prices are so low. But investor confidence has been sapped by signs that the U.S. economy remains exceptionally weak 15 months after the start of the recession. Markets are braced for more bad economic news this morning, with the scheduled release of the February unemployment rate, which is all but certain to rise from January's 7.6 percent. Forecasters estimated that the country shed more than half a million jobs last month.
The pace of job cuts is likely to remain brisk for at least a few more months, analysts say. According to newly released data, the nation's productivity, a measure of goods and services produced per hour, fell at the end of last year, indicating that employers have been shedding jobs but "not as fast as output has been falling," said Ken Troske, an economist at the University of Kentucky.
Businesses appeared to have been unprepared for how sharply demand has fallen. New orders for manufactured goods, for example, fell in January for the sixth consecutive month, according to data released yesterday. The aerospace giant Boeing said that for all of last month, it received just four orders, down from 125 last February. The service industry, too, has been contracting at a pace not seen in at least a generation.
Businesses won't be able to increase their profits until they can get productivity back up, and that means "we're going to need to see continued head-count reductions," T. Rowe Price economist Alan Levenson said.
But demand is likely to be anemic because consumers are already contending with mounting layoffs. Those who have lost their jobs are not eager to open their wallets, while many of those who remain employed are cutting back because of fears about job security.
The government has moved to stifle the job losses, primarily by approving a fiscal stimulus plan designed to plow money back into the economy. But the money has only just begun to flow, and the effects could take some time to kick in.
In the meantime, retailers are struggling. They posted another month of declining sales in February, down 0.1 percent at established stores compared with the same month last year, the International Council of Shopping Centers said yesterday. That performance was better than in January but was largely buoyed by Wal-Mart, which reported that sales at U.S. stores open at least a year grew by 5.1 percent.
Most other retailers continued to post lower sales than last year, though the declines have narrowed since the brutal holiday season. Among those posting the biggest losses were the teen retailer Abercrombie & Fitch and the department stores Nordstrom and Dillard's.