U.S. Economy: Consumer Sentiment Drops to 26-Year Low

U.S. Economy: Consumer Sentiment Drops to 26-Year Low (Update2)
By Courtney Schlisserman

April 11 (Bloomberg) -- Confidence among U.S. consumers fell to a 26-year low after employers fired workers and gasoline prices surged, threatening the spending that accounts for more than two thirds of the economy. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2 this month, the weakest level since 1982, when the jobless rate approached 11 percent, the worst since the Great Depression. In other figures released today, the Labor Department reported that the cost of imported goods climbed 14.8 percent in March from a year ago, led by oil. The reports validate concern among Federal Reserve officials that the economy will shrink in the first half of the year, and traders now anticipate the central bank will lower its benchmark interest rate by another half point on April 30. General Electric Co., the world's third-largest company by market value, also said today that its profit fell for the first time since 2003. ``The pocketbook issues are striking home,'' Richard DeKaser, chief economist at National City Corp., said in an interview with Bloomberg Television in Washington. ``People seemed here to be more focused on things like the rising unemployment rate, persistently high gas prices.'' Treasuries, which had risen earlier in the day after General Electric reported a 12 percent drop in earnings, stayed higher. Ten-year note yields fell to 3.47 percent at 5 p.m. in New York, from 3.54 percent late yesterday. Job Losses

Americans are confronting the loss of 232,000 jobs so far this year, along with higher food and energy costs and overall weakening in the economy. Consumer spending in the first half will advance at the weakest rate in 17 years, according to economists surveyed by Bloomberg News. Democratic presidential candidates Hillary Clinton and Barack Obama have focused on the weakening economy to press the case that Republicans, led by their presumptive nominee Senator John McCain, can't be trusted with another four years in the White House. In a speech in Indianapolis today, Obama, citing a poll, said ``folks are now more downbeat about their futures than they've been in nearly fifty years.'' Import prices rose 2.8 percent in March after a 0.2 percent gain the prior month, the Labor Department said. Expenses excluding fuels jumped 0.9 percent, the most since records began in 2001.

Import Prices
Import prices were forecast to rise 2 percent, according to the median estimate of 52 economists in a Bloomberg News survey. ``People will be a little less confident about the inflation outlook now than they were before the report,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who had forecast a 2.6 percent gain. ``The Fed's going to ease, but they'd feel better about it if these numbers had come in lower. The risk remains that higher import and commodity prices may get passed on to the consumer.'' Economists had forecast the consumer sentiment gauge would fall to 69, from 69.5 in March, according to the median of 64 projections in a Bloomberg News survey. ``The consumer's feeling increasingly hemmed in,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts. ``They've got higher energy bills, higher gasoline bills, higher food bills and obviously the employment markets are nowhere near as strong as they were.''

`Another Down-Leg'
``This kind of another down-leg does not augur well for consumption in the second quarter,'' Bethune added. Fairfield, Connecticut-based GE also cut the profit forecast that Chief Executive Officer Jeffrey Immelt 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.'' The Reuters/University of Michigan's index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, fell to 53.4, the lowest reading since November 1990, from 60.1 last month. The U.S. retail market ``will remain challenging this year,'' Patrick Bousquet-Chavanne, group president of Estee Lauder Cos., said April 9 in an interview at the World Retail Congress.

Spending Slowing
Consumer spending will rise at an average annual pace of 0.5 percent in the first half of the year, economists surveyed by Bloomberg News earlier this month forecast. That would be the smallest two-quarter gain since purchases fell in the six months ended March 1991. The economy will not expand at all the first six months of this year, according to the Bloomberg survey taken from April 2 to April 8. A majority of those polled also projected the world's largest economy is, or will soon be, in a recession. Job losses may continue into this month. The government said yesterday that the number of people remaining on unemployment-benefit rolls rose to the highest level in almost four years. Consumers polled in today's survey said they expect an inflation rate of 4.8 percent in a year, compared with 4.3 percent projected last month. Higher energy costs have weighed on consumers' outlooks in recent months. The average price of crude oil futures traded on the New York Mercantile Exchange in March jumped to $105.42 a barrel, from $95.01 a month earlier.

Gasoline Up
Gasoline reached a record $3.332 a gallon in the week ended April 7, according to the Energy Information Administration. The administration, which is the Energy Department's statistical arm, forecast on April 8 that gasoline will cost an average of $3.54 a gallon between April and September. Fed officials last month anticipated the economy will shrink in the first half of the year, and some expressed concern about ``a prolonged and severe economic downturn'' as they cut interest rates, according to minutes of their most-recent policy-setting meeting, which were released April 8. ``Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely,'' the Fed said in the minutes of the March 18 Federal Open Market Committee meeting. The Fed has cut its benchmark overnight lending rate by 3 percentage points since September to try to avert a recession. Last month, Chairman Ben S. Bernanke also invoked rarely used authority to provide emergency financing for investment banks and rescued Bear Stearns Cos. from bankruptcy. Send instant messages to your online friends http://uk.messenger.yahoo.com

US recession will not impact India adversely

India's not in a cyclical upturn, but has the ability to show high single-digit growth rates for a long time -Martin Feldstein, Professor Of Economics At Harvard University, WHEN Martin Feldstein, George F Baker Professor of Economics at Harvard University, declared recently that the United States has already slipped into a deep recession that could be the most serious since World War II, it shocked many observers. Especially, since Mr Feldstein also heads the National Bureau of Economic Research, an organisation that is the official arbiter of when recessions begin in the country.

But Mr Feldstein says that the impact of a possible slowdown in the US will be very limited on
countries like India and China. The expert on global business cycles also feels that India is not
just in a cyclical upturn, but has the ability to show high single-digit growth rates for very long
periods of time. Excerpts from the interview with the noted economist, who was once tipped to
succeed Alan Greenspan as the Federal Reserve governor.

What are the lessons from the housing-related credit crisis that has struck the global economy?
Rather than the low interest rates, it's the price we are paying for not being careful. (Mr Feldsteinhad earlier said that in the past instances of recessions it was the Fed policy at work unlike this time.) Everybody from borrowers, lenders, rating agencies and supervisors at banks thought that housing prices would go up forever, and hence, nobody bothered. Securitisation and derivative products only made it worse since it was impossible for house owners to negotiate, as there is nobody on the other side. After going up more than 60% from 2000 to 2006, they have only gone down 15% since this credit crisis appeared. The only danger is that if more defaults happen, prices could fall faster than the speed at which they went up.

What will be the impact of the slowdown in the US on emerging markets like India and China?
This question will have to be answered under three heads. On the trade side, a slowdown will
reduce our (the US) imports with countries that we trade with. At most, a percentage point from
the growth rates may be shaved off. In the currency market, the dollar will continue to decline on a global basis although it will be hard to say how much the dollar will decline against individual
currencies. But again, I think it will not have a substantial adverse effect on India. What is
important is what happens through financial markets and equity markets. On one hand, people
may be very nervous and stop risky instruments, as emerging markets are risky and take money home and buy bonds. Alternatively, they may want to have some money in equities outside the US because of the recession. India could benefit from such investors.

How will dollar's slide affect global economy and trade?

We have to distinguish between trade effects and asset effects for the central banks. Although
India has a trade deficit, other economies like China, Korea, Japan, Europe, the Middle East and
Russia have strong surpluses. So, they are in a better position to withstand the effect of increased competitiveness in the US.

On the central banks side, those that don't fix their exchange rates to the dollar take a loss to the
extent that the dollar is coming down and their currencies are appreciating. But the big question is what they are going to do about it, if their currencies continue to appreciate.

Your comments on perception of sovereign wealth funds and private equity funds with regulators.

The principal concern in the US is that what a sovereign wealth fund (SWF) buys could end up
giving it political power. Decision could then be influenced by political considerations rather than
commercial, especially with respect to China and Russia since they are not fully independent.
However, others like Singapore and Norway are simply looking for higher returns. But the rule
book has to be common, hence the trouble. Unlike the Europeans, however, the US is very open
to foreign investments from commercial investors.

As for India, it is a country with too many rules of foreign ownership that need to be relaxed,
and hence, it would be a pity if this discussion about SWF and private equity funds leads to
further tightening in the regulations. As for influence of private equity funds in financial markets,
a prolonged credit crisis will definitely affect it in the long term. PEs are highly-leveraged players
who would suffer if no credit is available.

What are the constraints before the Indian economy?
I am very optimistic about India's future despite its problems of low agriculture productivity,
electricity and labour reform (so many small industries actually give China the advantage). But
every year, when I go from Delhi to Neemrana Fort Palace in Rajasthan (he has been coming
every year for NBER-NCAER conferences), I find the roads are getting better and I reach faster.
Just that I am disappointed when I come to Mumbai with all its traffic.