Steep Slide in Economy as Unsold Goods Pile Up (Q1 GDP decine "will probably exceed" 5%)

[Amerigo Vespucci]

Steep Slide in Economy as Unsold Goods Pile Up

By LOUIS UCHITELLE
Published: January 30, 2009



The economy shrank at an accelerating pace late last year, the government reported on Friday, adding to the urgency of a stimulus package capable of bringing the country back from a recession that appears to be deepening.

The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.

“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”

The dismal fourth quarter, and the likelihood of more of the same through the spring, are fueling discussion among policy makers and politicians over the best way to spend the soon-to-be-authorized federal money.

http://www.nytimes.com/2009/01/31/business/economy/31econ.html?_r=1

[ConcernedCanuk]

1. There are millions of vehicles across the globe stored outside, rusting - -

.
.
.

They will be garbage, problem vehicles whenever they get purchased

and things will get worse again

Food prices have skyrocketed - even here, in less than a year, bread was 70 cents, now is $1.50

I read/heard somewhere else

and I believe it

"we've only just begun"

(sorry, Karen)

[xchrom]

2. only the very largest retailers can withstand inventory

larders the scale of what we're looking at.

smaller stores don't stand a chance in the 'fire sale' that coming.

[Liberal_in_LA]

3. “The drop in spending was so fast, so rapid, that production could not be cut fast enough,”

:o

[Ikonoklast]

4. This is a recipe for deflation.

People will not spend a dime if they think that if they wait a week, or a month, they will get a better deal as retailers will cut prices to move unsold inventory.

Then they figure they might get a better deal if they wait six months, or a year for durable goods or larger capital outlays. Retailers trying to stay afloat cut prices even further, steepening the race to the bottom.

I have a friend that re-habs distressed properties, and he deals with banks directly with foreclosures and real estate agents with problem units that aren't selling, have no offers, and need some work.

He is waiting out the market as it is nowhere near a bottom, and the calls from the banks are getting desperate as they are looking over bids they declined six months ago and are now telling him they will accept them.

He just laughs, and cuts the previous bid IN HALF, take it or leave it.

Some of them said they would get back to him on it.

[Selatius]

5. That's partly the reason why the 1929 recession turned into the Great Depression of the 1930s.

People stopped spending money thinking they could get a better deal later. The worse things got, the more people cut back. It was a cycle that fed on itself. Once deflation began, it was incredibly difficult to stop. FDR only managed to reverse it completely by marshaling manufacturing capacity to fight a world war. Hopefully, we will not need a gigantic world war to put people back to work.

[4lbs]

6. People stopped spending in 1929 because they lost all their money in the banks.

The FDIC didn't exist back then and when people had, say, $1,000 in savings in a bank that went belly-up, they lost that money.

Kind of hard to spend money when you lose it all because the bank that it was deposited disappeared and took the dough with it.

[Selatius]

7. That's true, I should have mentioned it, but what I said was equally true.

People who still had a job and were with a bank that didn't fail (national unemployment reached about 25%) stopped spending as well, not just those who lost their jobs or all their savings.

[SoCalDem]

12. and people who are not secure in their workplace tend to pinch every penny

If unemployemnt can be right around the corner, you;re not going to buy that spiffy couch you've been eying..or that car, or a new tv..or anything..

People hoard what cash they have until they absolutely HAVE to spend it..

and once the vortex starts spinning, it sucks everything into it...

[Ikonoklast]

9. Yup. Deflation is much more insidious, and harder to stop than inflation.

I am of two minds on this, though, and can't for the life of me figure out which direction this disaster is going.

On one hand, we have consumers on strike as they try to cut unneeded purchases to the bone, not knowing if their job is the next one to get the axe, putting downward price pressure on goods, services, and incomes.

And on the other hand we have the most massive monetization of worthless debt on a scale the likes of which this planet has never seen, with the potential to make currency worthless as faith in it vanishes, causing massive inflation.

I get a headache just thinking how bad it just might get, and we are only in the first inning.

[Selatius]

11. I'm not even sure the recession can be contained anymore.

The Federal Reserve is at the point where they're going to put in place a 0% interest rate. What are they going to do afterward? Impose negative interest rates?

And the federal government is woefully in the red as far as deficit spending goes already. More deficit spending, even if it is aimed in New Deal-like programs, could push the market for US Treasury bonds into saturation point (Does anybody know where the saturation point is?) before the economy swings up. At that point, further deficit spending will simply provoke Weimar Republic-style inflation and then undo any progress made kick-starting the economy.

When FDR inherited Hoover's problems, Hoover didn't leave FDR epic deficits. He still had a lot of room left to accommodate deficit spending for the New Deal programs. Obama is on different ground here.

In general, I'm speaking as a person who believes the best remedy for depressions is massive spending the likes of which was seen with the New Deal, but spending has its limits, but you want to do it without annihilating your own currency in the process.

[Ikonoklast]

13. We will soon see what direction this will head, as there is a wave

of ARM's coming due this year, peaking by the end of the second/beginning of the third quarter. These are people that bought at, or very near the top of the market.

What are those people going to do when they cannot re-finance or fix their mortgage; cannot get a bank to loan them what they currently owe on a house that has lost value, leaving them with negative equity; cannot find a financial institution that is willing to loan out mortgage money, period?

More downward pressure on real estate values, more foreclosures, more price deflation in an already crashing real estate market.

More bank failures.

[starroute]

14. Treasury bonds

At least one of the many articles I've read over the last week claimed that as bad as things are here, they're worse in much of the rest of the world -- so that US Treasury bonds are still seen as a safe haven and will continue to be bought up.

I have no idea if that's true -- and at best, it just kicks the problem on down the road. But it does suggest there will at least be funding for the stimulus program in the short run.

[OhioChick]

8. K&R

:kick:

[punkin87]

10. Sign of our times. Didn't Bush and McCain say the economy was sound just a few months ago?