More happy talk on Wall Street this week is based on the fact that now that we’ve admitted there’s a recession, it’s that the recession itself will be short and shallow. There are three really big problems with that assessment.
First, the collective damages from the subprime/credit crises still hover around a quarter-trillion dollars. We have a long way to go to reach the Roubini Line, a full trillion in damages (and that’s the floor, Roubini is now seriously talking about losses in the $1.7 trillion range). There is still far more damage to come from the financials and from housing.
Second, we’ve already been in recession now for a good three months or so. With far more damage on the way, the prospect for a prolonged recession and even a depression is growing.
Third, and perhaps most telling, is the fact that we’re now seeing serious solvency and stability problems seep into other industries.
Frontier Airlines Holdings Inc., the U.S. discount carrier that serves 70 destinations from Denver, filed for bankruptcy, becoming the fourth U.S. airline to seek court protection in less than a month.
The move was triggered by a credit-card processor’s decision to withhold proceeds from ticket sales, the Denver-based carrier said in a statement today, without naming the company. Frontier pledged to continue flying and keep paying workers while it seeks additional financing.
“We filed for very different reasons than those of other recent carriers,” Frontier Chief Executive Officer Sean Menke said in the statement. “We believe that we currently have adequate cash on hand to meet our operating needs while we take steps to further strengthen our company.”
Frontier’s action adds to the turbulence in the U.S. airline industry. American Airlines canceled more than 3,000 flights this week to inspect and repair wiring on its Boeing Co. MD-80 jets. U.S. carriers will post combined losses of $1.2 billion in the first quarter, Ray Neidl, a New York-based analyst at Calyon Securities Inc., said in a report today.
The cost of jet fuel, soaring 78 percent in the past year, and a slowing economy were blamed for the filings of Skybus Airlines Inc., Aloha Airgroup Inc. and ATA Airlines Inc. in the past three weeks.
Four airlines in the US have gone under in just the past month alone. American continues to cancel flights daily in order to complete lax inspections on its fleet (another benefit of Bush’s mass deregulation mindset). Consumers are buying less of everything and that is being passed on as cutbacks in other industries.
What’s happening to the airlines now will continue to happen to other industries as 2008 wears on. With so much of the airlines’ profit being eaten up by fuel price increases, they’re doing everything they can to stay afloat. We’re seeing many of the “discount” carriers fall. We’ll see more go under as fewer Americans take to the skies.
And it’s not just the airlines that are hurting, but traditional Dow components that are showing major problems.
General Electric Co. reported its first decline in quarterly profit since 2003, missing analyst estimates with a 12 percent drop in earnings as a freeze-up in credit markets blocked asset sales and forced it to write down the value of investments.
The world’s third-largest company by market value fell as much as 11 percent, the most since 1987, in early New York trading after GE also cut the full-year forecast that Chief Executive Officer Jeffrey Immelt had once told investors was “in the bag” for 2008.
“We hate disappointing investors,” Immelt said in an interview on the company-owned CNBC television network. “It’s not part of the company. It’s not part of the culture. We take accountability for that.”
General Electric’s miss came without warning as it was forced to cut the value of some securities in the last two weeks of March as capital markets seized up, Immelt said. That also prevented GE from selling some finance assets. GE put its U.S. credit card business and Japanese consumer finance units up for sale last year. The health-care unit also trailed expectations.
Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year ago. Revenue rose 8 percent to $42.2 billion.
The stock dropped in early U.S. trading to as low as $32.55 from yesterday’s New York Stock Exchange close of $36.75. The shares had fallen less than 1 percent this year compared with a 7.3 percent decline in the Standard & Poor’s 500 index.
If GE is in trouble, a whole hell of a lot of other companies are in trouble as well. Traditionally these companies turn to layoffs and buyouts to solve their problems, but if everyone laying off, who is going to have the money to purchase products and services?
The downward spiral that will result from another trillion plus in financial losses will spread all across the economy. Companies on the edge will fall in, and that in turn will put more companies closer to that edge, resulting in more jobs lost, less spending, less profit, more layoffs, more bankruptcies, etc.
It’s not going to be pretty. Consumers are the engine of this economy and have been for some time now. And now we’re seeing the worst consumer numbers in a generation.
U.S. consumer confidence fell to its lowest in more than a quarter century in early April, diving deeper into recessionary territory on heightened worries over inflation and jobs, a survey showed Friday.
The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence fell to 63.2 in April from 69.5 in March.
This was well below economists’ median expectation of a reading of 69.0, according to a Reuters poll.
The April result is the lowest since March 1982’s level of 62.0, when the “stagflationary” period of low growth and high inflation was still fresh in the memory of many Americans.
“There have only been a dozen other surveys that have recorded a lower level of consumer sentiment in the more than 50-year history of the survey,” The Reuters/University of Michigan Surveys of Consumers said in a statement.
“Persistently high food and fuel prices as well as rising unemployment have caused consumers to view their future financial prospect more negatively (than) any other time since 1980.” The report showed its reading on one-year inflation expectations jumped to 4.8 percent — the highest since a similar reading in October 1990 — from 4.3 percent in March.
Five-year inflation expectations rose to 3.1 percent — the highest since December 2007 — from 2.9 percent in March.
The index of expectations for personal finances fell to 97, its lowest since April 1980 when it was 94, from 112 in March.
The index of current personal finances fell to 87, its lowest since November 1982, when it was 85, from 93 in March.
All of these numbers point to the rest of 2008 being abysmal. There’s going to be a lot more damage to the economy over the next several months, and the results are going to be the worst in a generation…maybe several generations…that we’ve seen here in the US.
The global economy is far more interconnected than it was back in the stagflation days of the 70’s and early 80’s. It’s also far more vulnerable to shock and damage due to most of the regulatory structure supporting a number of industries having been stripped away by the Bush administration.
The same games that allowed for the super-leveraging of entire industries has meant that rough times for those same industries now mean massive losses instead of record profits. Those losses will be taken out on employees rather than the people responsible for making these bad decisions.
The result is everyone will suffer.
Be prepared.