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Title
Economy nearly stalled in 4th quarter

Link
Economy nearly stalled in 4th quarter - Yahoo! News
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Excerpt

Economy nearly stalled in 4th quarter

By JEANNINE AVERSA, AP Economics Writer 10 minutes ago

WASHINGTON - The economy almost stalled in the final quarter of last year with a growth rate of just 0.6 percent, culminating its worst year since 2002.
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The Commerce Department's report on the gross domestic product, released Wednesday, showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse dealt the economy its biggest blow last year. Builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

The fourth-quarter's performance was much weaker — half the pace — than economists were expecting. They were forecasting growth to clock in a 1.2 percent pace.

The 0.6 percent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

The GDP figures come as worries mount that the country is on the verge of a recession or perhaps is already sliding into one.

To help bolster the economy, the Federal Reserve was poised Wednesday to again cut interest rates. An afternoon announcement was expected.

The fragile economic situation has spurred rare cooperation among Democrats, Republicans and the White House to quickly enact legislation to stimulate the economy.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

Consumers whose spending is critical to the economy's well-being tightened their belts.

In the fourth quarter, consumer spending slowed to a pace of 2 percent, down from a 2.8 percent growth rate in the prior quarter. For all of last year, consumers boosted spending by 2.9 percent, the smallest increase since 2003.

Businesses also watched their spending more closely during the final quarter of last year. Fearing a lessening appetite from their customers, they cut inventories of goods. That shaved 1.25 percentage points from fourth-quarter GDP, the most in a year.

Spending by businesses on equipment and software slowed to a pace of 3.8 percent in the fourth quarter. For the year, such spending was up just 1.4 percent, the worst showing since 2002.

Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.

Meanwhile, inflation picked up sharply. However, for all of 2007, it moderated slightly.

A gauge of inflation linked to the GDP report showed that "core" prices — excluding food and energy — grew at a rate of 2.7 percent in the fourth quarter. That was up from a 2 percent rate in the prior quarter and was the biggest quarterly increase since the spring of 2006.

For all of last year, core prices went up 2.1 percent, down from 2.2 percent in 2006.

High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.

The inflation figures could complicate the Fed's job of trying to energize overall economic growth while also keeping inflation under control.

Some analysts think the economy is on pace to recede from January through March. Under one rough rule, the economy would have to contract for six months in a row for the country is considered to be in a recession. The odds of a recession have risen sharply over the last year, and analysts increasingly believe the U.S. will be in one during the first half of this year.

The big worry is that consumers will clamp down on spending and businesses will put a lid on capital spending and hiring, throwing the economy into a tailspin.

The collapse of the housing market, soured mortgage investments and much harder-to-get credit are weighing on people and businesses alike. Foreclosures have hit record highs and banks have wracked up multibillion losses. The fallout has shaken Wall Street, catapulted the economy as Topic A among voters and galvanized political figures, including those vying to be the next president.

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Comment:

on THIS disasterous news, the market is hoping the fed may cut the rate by 1/2 a point...

and if they do, all i can say is "here we go again!"
more cheap money - which caused all this in the first place!

stalled economy, high interest rates = stagflation! the worst of all possible senarios!

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itsmeeeeeee

UBS subprime losses mount, bank deep in red

UBS subprime losses mount, bank deep in red - Yahoo! News

By Thomas Atkins Wed Jan 30, 4:26 AM ET

ZURICH (Reuters) - Subprime-related problems at UBS AG (UBSN.VX) mounted on Wednesday as the Swiss bank unveiled $4 billion in new write-downs in a surprise statement and sank deep into the red for the year.


The latest disclosure lifted the bank's total write-downs from the subprime debacle to $18.4 billion and will likely increase pressure on chairman Marcel Ospel, at the UBS helm during its push into risky U.S. investments, to resign.

UBS, world banking's leading wealth manager, posted a 12.5 billion Swiss franc ($11.45 billion) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs, a grim closure to its worst performance in history.



taking the globe down with us... one bank at a time!

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mudwhistle

The Economy Is Fine (Really) - WSJ.com

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.
[Wesbury]

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year -- real GDP expanded 4.4% at an annual rate between April and September.

With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.

Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications.

Some large companies outside of finance and home building are reporting lower profits, but the over-reaction to very spotty negative news is astounding. For example, Intel's earnings disappointed, creating a great deal of fear about technology. Lost in the pessimism is the fact that 20 out of 24 S&P 500 technology companies that have reported earnings so far have beaten Wall Street estimates.

Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%. This was true before recent rate cuts and stimulus packages. Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown. The biggest threat to the economy is still inflation, not recession.

Yet many believe that a recession has already begun because credit markets have seized up. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire "house of cards," otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.

For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire.

This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets.

Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.

In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.

But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.

These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.

Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.

Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.

The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it's the development that investors should really worry about. It reads just like the 1970s.

The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It's a wonderful buying opportunity.

itsmeeeeeee

stand back! mud's binging on the murdock koolaid!

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DRS112

I liked this....

itsmeeeeeee

Greenspan doubts Fed's ability to prevent recession

Greenspan doubts Fed's ability to prevent recession - Yahoo! News

2 hours, 1 minute ago

BERLIN (AFP) - Former Federal Reserve chief Alan Greenspan cast doubt on the ability of the central bank to prevent a US recession in an interview to appear on Thursday.

Greenspan told the German weekly Die Zeit that the Fed or political policies could "probably not" keep the world's biggest economy from sliding into recession, as financial markets widely expected the US central bank to cut its main lending rate.

"The influences of the global economy today are stronger than almost any monetary or budgetary response," the German-language weekly quoted Greenspan as saying.

Although he left the post of Fed chairman two years ago, Greenspan's opinions on the economy are still sought after.

"Real long-term interest rates have much more influence over the heart of economic activity than national decisions," he was quoted as adding.

"And central banks have less and less power to influence long term rates."

The former Fed chief put the chances of a US recession at 50 percent, but added: "We have few indications that would allow us to say we are already there."

Some analysts have said that low interest rates under Greenspan's watch were responsible in part for the US housing bubble that burst last year, and led to the current financial crisis.

Die Zeit quoted him as saying he found it hard to understand that "the Federal Reserve policy had somehow allowed housing and stock prices to rise."

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cheapseats

STAGFLATION: stagnant growth, coupled with inflation.

Call a spade a spade.

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