2008 off to a shaky start Dallas TX

The year 2008 has already started out with a bang. The race for the presidency has started and candidates are chasing around the country trying to get their party's nomination. Crude oil prices hit the magic $100 per barrel mark at the very beginning of the year. The Federal Reserve Chairman announced that he believes the economy needs a stimulus to "support growth and to provide adequate insurance against downside risks." Unemployment is up, and the value of the dollar remains low. With all this going on, it will pay for us to take a good look at the details of what's been happening.

Consumer prices

The Consumer Price Index (CPI) is one of the most basic measures we have for figuring out what is happening to the wage earners and the general economy. The December number of 210.036 shows a very slight decline from November and is the first drop in CPI we've seen since November 2006. Because the decrease is so small, it is possible that there is an error in the calculation, but regardless of what is learned in the future, the initial publication is what affects how the market reacts; no restatement can ever change it. The annualized inflation rate for 2007 was 4.0 percent and the table below shows just what has happened in the past few years.

The whole story is in the details, and the table below shows how drastically things have changed in the past five years.

Transportation prices for the year were up an amazing 8.3 percent, as compared with a mere 6.5 percent increase back in 2004. Medical care was up 5.2 percent from last year, which tops the 4.3 percent increase we saw in 2005. Food and beverages were next in line with a 4.8 percent increase, and that's the highest we've seen since the 3.5 percent rise we experienced in 2003. Housing cost increases were down from the previous three years, but that doesn't say anything about the mess that housing is in right now. The only real bright spots would seem to be in recreation and clothing, but that doesn't make any statement about the fact that the bulk of the clothing price decreases are because of the prevalence of imported goods.

When we look at information that contribute to the numbers, we see that oil prices hit the magic $100 per barrel price in early January and are still high. The more stringent emission controls required for diesel engines have increased the prices for those newly manufactured vehicles which have, and will continue to, increase the cost of transportation and food. The costs associated with the stricter emission requirements have also pushed Mitsubishi Fuso Truck of North America to announce it will stop selling its medium-duty models after 2010. This announcement will definitely affect the marketplace both today and in the future as prospective buyers look for alternatives.

Gross Domestic Product

The Gross Domestic Product (GDP) for the third quarter of the year rose from 13.77 to 13.97 trillion current dollars and from 11.52 to 11.66 trillion year 2000 chained dollars. This represents a 5.3 percent increase in current dollars and a 2.8 percent increase in constant year 2000 dollars. These annual changes are similar to what we saw last year at about this same time.

A look at labor

The news that got everyone really worried was the December unemployment rate increased from 4.7 to 5.0 percent. This is the highest level we've seen since November 2005 and reflects the very slow increase that has been seen since March. Looking at the total civilian labor force since January 2007, we find that employment increased only by an average of 74,000 people each month as compared with the average of 221,000 person monthly increase seen in 2006. We've watched this trend of decreasing labor force change throughout the year, but it looks like it's finally making its presence known in a big way.

Real Earnings are something to look at to see just how the employee has fared in this calendar year. Unfortunately, Real Earnings for December were shown as an increase of 4.1 percent in current dollars from the previous December and 0.1 percent in 1982 constant dollars during the same time period. With inflation for the 12-month period at 4.0 percent, it's plain to see that employees are about even. Need we say more?

Employee productivity was up minimally in the last quarter of the year and it looks as though the productivity over the past five quarters has remained significantly lower than we saw in 2005.

Mass layoffs

Mass layoffs reported for November brought the total number of events for the year to 13,746 as compared with 12,627 for the same period in 2006. This 8.9 percent increase is accompanied by a 10.7 percent decrease in the number of workers affected. The layoffs for temporary workers rose by about 8.1 percent over the 11-month period to 87,900 people. The fact that there were less people laid off for the 11 months of 2007 than in the previous year didn't help the total picture because there weren't enough new hires to swell the ranks of the employed as there had been in the past. Additionally, the number of temporary workers nearly doubled from about 6,000 layoffs in October to over 12,000 in November. We've discussed the importance of temporary workers in all positions in industry in the past, and this round of layoffs really shows how important an indicator their status can be.

Interest rates

In a speech presented by Federal Reserve Board Chairman Ben Bernanke to the Budget Committee of the U.S. House of Representatives, we were told that the fed is definitely concerned about the possibility of an economic recession and he favors the fast implementation of a fiscal package that provides short-term stimulation. This statement brought about a number of proposals from Washington that, unfortunately, will be designed to get the most political mileage in this election year. Another statement made by Bernanke was that any news about the economy can change the way the market sees things. As proof of the validity of this statement, we saw stock prices move up on the news that President Bush proposed a $140 billion stimulus package.

There were two surprise moves made by the Federal Open Market Committee in January. The first was on Jan. 22, when they cut the Overnight Rate a week before the regularly scheduled meeting by 75 basis points down to 3.50 percent and dropped the Discount Rate by the same 75 basis points to 3.50 percent. The second surprise was announced on Jan. 30, when they made another cut of the Overnight Rate by 50 basis points to 3.0 percent and then approved a reduction in the Discount Rate to 3.50 percent. In both actions there was only a single board member who opposed the changes. When announcing the first change, the committee made the following statement:

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in the short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

When announcing the second change they stated that "… recent information indicates a deepening of the housing contraction as well as some softening in the labor markets."

The housing market

If there have been things in the news lately that will give us a sense of what the people on the street are talking about, they are the condition of the housing market, the mess caused by the subprime lending practices, and their effect on the economy as a whole. New home sales for December were reported at the annual rate of 604,000, which corresponds to a seasonally unadjusted monthly volume of 42,000 units. Simply looking at the information in Chart 3 shows just how new home sales have changed in the past few years and what the situation looks like. With the threat of recession upon us, I don't think things will improve too much this year.

Existing-home sales for December were reported at a seasonally adjusted annual rate of 4.89 million units. This can be compared to the December 2006 rate of 6.22 million or a 21 percent decline. New housing starts for November were a bit misleading as the November 2007 rate of 1.17 million homes compares very favorably with 1.15 million starts reported the previous November. In December the real effect of the housing problems were brought home as the 1.18 million homes started in December 2006 fell to 1.01 million in 2007.

The fallout from the subprime lending problems hasn't ended yet, and I don't foresee it clearing up in the short term. Countrywide Mortgage recently accepted a buyout from Bank of America with terms very favorable to the bank. Both parties acknowledge that the final price was based on the understanding that the number of foreclosures will continue to rise in selected markets as owners are unable to handle the increased mortgage payments and find they cannot refinance the homes for better rates because they have been devalued below the outstanding balance levels.

With the total of subprime mortgages valued at somewhere around $130 trillion, we can expect to see several more losses announced by banks, mortgage companies and investment companies as time progresses and as they learn just what the real values of their financial papers are. We've already seen a number of CEOs lose their jobs over their roles in the mortgage market, and we'll probably be seeing others fall by the wayside as more information becomes available. Will there ultimately be a scandal as big as the one on the collapse of Enron? Will many more people be hurt? Will someone come in to bail out the losers? We'll just have to wait and see.

Ed. note: Columnist Jacob Schulzinger holds degrees in both mechanical engineering and business administration and has worked in manufacturing for over 40 years. He is currently employed as a technical writer and project manager in Houston, Texas.