Fears mount over US economy


The US economy has been hit by more bleak news, with a series of announcements adding to an already gloomy picture.

A slump in consumer spending, another drop in the dollar, and oil prices at new highs pushed the White House to admit that the next few months would be “difficult and challenging”.

First came the news of weaker than expected February retail sales figures, reflecting a lack of consumer confidence that could prove fatal for an economy where consumer spending accounts for two-thirds of total activity.

The commerce department reported that consumers, battered by falling home values, job losses, soaring energy costs and a severe credit squeeze, held back on spending in February. The 0.6 per cent drop was the second big drop in retail sales in the past three months, a pattern consistent with the onset of a recession, and many economists believe the country is in recession or will be soon.

‘Difficult and challenging’

The Bush administration rushed out new proposals to avoid a repeat of various problems that have led to a severe crisis in credit markets.

Tony Fratto, the White House deputy press secretary, said the government expected a “difficult and challenging” period but predicted an economic rebound once the impact of the Federal Reserve’s credit cuts and the recently passed economic stimulus package began to be felt. But private analysts were not as confident, worrying that the economy is being hit by multiple blows and noting that some of the problems, such as plunging home sales and mortgage defaults, are showing no signs of abating. “We’re in the belly of the recession beast right now and all we really can do is take defensive action,” Bernard Baumohl, managing director of the Economic Outlook Group, told the Associated Press. George Bush, the US president, is expected in New York on Friday to deliver a speech on the economy. “I think it’s important for the president to get out and talk about how he sees the economy, and why he sees the economy improving as the year goes on,” Fratto said.  But Fratto conceded that surging energy prices were acting as a drag and “higher oil prices and higher gasoline prices are not going to go away overnight”. Crude oil prices hit all-time highs on Thursday with crude closing at $110.33 per barrel on the New York Mercantile Exchange.

Dipping dollar

February’s retail sales was weaker
than expected [AFP]

The dollar, meanwhile, dropped anew, dipping briefly below 100 yen for the first time in 12 years and falling to a new low against the euro.

Gold prices topped $1,000 an ounce on Thursday for the first time after the dollar’s plunge.

Gold, which is priced in dollars, becomes cheaper for buyers using other currencies when the US unit falls in value.
 There was also the troubling news that Chrysler, the country’s third largest car manufacturer, announced it was shutting down operations for two weeks in July to boost productivity and efficiency. 

‘End in sight’

On Wall Street, stocks slid more than 200 points but then rebounded to close up more than 30 points as traders grew hopeful about a Federal Reserve rate cut next Tuesday of up to three-quarters of a point. Investors’ moods were also bolstered after the Standard & Poor’s predicted that financial companies were nearing the end of the massive write-downs in the value of sub-prime mortgages and other assets. “The end of write-downs is now in sight for large financial institutions,” it said. The president’s Working Group on Financial Markets, led by Henry Paulson, the treasury secretary, put forward a broad blueprint of changes on Thursday aimed at correcting a variety of abuses such as mortgage brokers who pushed prospective buyers into loans they could not afford. While the recommendations could help prevent a repeat of the current crisis, critics said the administration still needed to go much further to stave off an expected tidal wave of foreclosures in coming months. 

Nearly 60 per cent more US homes faced foreclosure in February than in the same month a year ago, according to a report on Thursday from California-based RealtyTrac.