Saturday, October 4, 2008

Jobs fade and rate cuts looms

Good news is overtaken by reality
The bail-out plan is in. Job growth is out. So where's the good news?

Going in reverse...
We are now going to see how long it takes to put this new plan with its untried reverse auctions into practice.

Captain CRUNCH
While we wait for that, the credit crunch is busily crunching. Auto sales this past month were very weak and the crunch has not yet set in on that sector. Crunch. Crunch. The housing mess, as we have been saying is going to get worse. Crunch Crunch. Construction sector job losses got larger this past month. Crunch. Crunch. Overall job losses were out-sized last month and the length of the work week pulled back. Together these pull backs hint of a strong retraction of economic activity. And in the background you know what we have working against us...Crunch. Crunch.

Job losses are in train. The service sector is seeing strong job losses in comparison with past recessions. The MFG sector usually unravels in recession and that has not really happened yet. Exports have helped cushion the MFG blow. But with the service sector impacted, construction losses growing and MFG losses in train (even if they are not as severe as in the past) the prognosis for income growth and consumer spending is pretty poor. The shortened work week will amplify that problem.

Is MFG getting a late srtart on its recession losses?
We can wonder if the sharp drop in the ISM and its key components signals a step up in the recession's impact on MFG. The ISM showed weakness that in some ways is unprecedented in the history of this venerable report that goes back to 1950s. If MFG does cave in, we could be in for something that is very severe, since the service sector is already so weak. Certainly there are some early warning signals out there.

Got rate cuts?
We have been opposed to Fed rate cuts up to now. Rate cuts will not cure the financial problems. But with economic weakness hitting a new low and a credit crunch emerging it is probably time for the Fed to do what it can. Rate cuts are no panacea. But with the credit crunch tightening last week, mortgage rates were squeezed even higher. A rate cut could keep that sort of pressure at bay. We do look for the Fed to chip in and act. The likely cut is 50Bp. The Fed has to do more than 25bp but we don't think it will want to cut by a full percentage point and put the Funds rate at 1% just yet.

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