Economics

There was no good news in the retail sales figures released this morning. Here’s the Census Bureau press release ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES:
Latest Release

Of particular note is the astounding drop in auto sales from last year: 25.2% down. No wonder GM is feeling the squeeze.

The last quarter has seen a drop of 4.5% year on year, and November’s 1.8% fall was the fifth straight month of decline.

There is nothing bright in this news. Obviously something dramatic is necessary before consumers take the plunge back into spending. With yesterday’s announcement of 35,000 layoffs at Bank of America to highlight the horrible employment outlook I just don’t see that the consumer will feel confident enough to go out shopping anytime soon. especially for any big ticket items. So we should expect steadily contracting sales for a few months more.

The point to remember is that these kinds of declines can become self-fulfilling spirals downward. As sales drop companies fire workers; that increases insecurity and so consumers shop less; that causes sales to drop some more. And so on.

The bottom only comes when consumer confidence recovers. For that to happen the economic news has to brighten: interest rates must fall, home prices must stabilize, and job security has to be restored.

The role of government is to fill the void created as the private contracts. Hence the need for huge stimulus spending.

Joe Stiglitz has this to say about the auto industry bailout: FT.com / UK – Chapter 11 is the right road for America’s carmakers

He muddles some things up. He says, for instance, that the bailout has been mischaracterized as a bailout of ‘undeserving dinosaurs’. Which in my opinion is exactly what it is. Where is the mischaracterization? He goes on to say that the real problem lies with the shareholders and bondholders of the auto makers. He objects to the bailout assisting them since they have not allocated capital efficiently and have allowed the management of the car makers to mess things up.

Well? What does this add? Nothing. The shareholders are part of the company. They own it. While it may be true that people who own stock are also participants in the financial markets, for the period during which they own a particular stock they are also ‘insiders’, they become part of the auto industry. The bondholders not so much, since they never have ownership.

The ‘failure of oversight’ does not, one iota, diminish the criticism of the auto makers as ‘undeserving dinosaurs’. The lack of oversight is endemic in bureaucratic capitalism. It is the reason so many failed managers still get paid vast amounts. Making a statement that there has been a mischaracterization leads the reader to expect the identification of a new villain.

But Stiglitz doesn’t do that and so does nothing to advance the analysis. Instead he simply gives a slightly more nuanced version of what we’ve all been saying.

This is especially true when Stiglitz says that he agrees with bankruptcy as the solution. Most of arrived there a while ago.

Ironically, take away this dotty reference to mischaracterization and I agree with the thrust of Stiglitz argument. What it adds to the discussion I don’t know.

Anyway: I pass his comments on to you. It’s good to see a Nobel Prize winner agree with the bankruptcy route to a solution!

Lost in all the blather about the nearly defunct American auto industry was the news today that jobless claims, those people filing for state level unemployment payments, jumped by over 50,000 last month:
First-time jobless claims jump to 573,000, a 26-year high – MarketWatch

There a few salient points here:

First: This is bad news. A jump like this means that last month’s unemployment figures were not an aberration, but more likely the beginning of a nasty trend.

Second: This is the worst data since the bottom of the 1982 recession, which was a very bad downturn.

Third: It is rare for unemployment to rise this quickly so early on in a downturn.

Add these together and today’s news is grim. 1982 was the closest we have been to sliding into a full bore depression since the 1930’s, so we don’t want to see references to it in our current statistics. Plus this kind of news all but assures us that the peak of unemployment this time through will be high: possibly well above 10%, and certainly above the peak of around 8.5% we reached back in … 1982.

Senator Corker has floated an alternative plan to the one the House passed. The Democrats are in deep negotiation with him and other Republicans to see whether the Corker plan can be used as an effective base for a bill that will get enough votes to pass. Here’s the New York Times report: Auto Bailout Bill Appears Stalled in the Senate – NYTimes.com.

The new components that Corker is suggesting are a massive debt forgiveness program, and a big pay cut. These are two elements that are normally associated with a bankruptcy, so, in effect, the Corker plan is a government sponsored bankruptcy.

The bondholders of both GM and Chrysler are in for a nasty ‘haircut’, and the workers who not ‘restructured’ out of their jobs will all be earning a lot less. Critically the new plan insists that this is all done before the end of March next year. If either company fails to abide by the plan then a government overseer will push them into full bankruptcy.

This is tough medicine.

Stay tuned. the vote may not happen until the early hours of Friday.