The "Real" Economy Heads South

"Everyone has been acutely focused on Washington — specifically, if and how the financial industry will get bailed out. The Senate voted to approve a revised $700-billion bailout package, one that's packed with all kinds of fresh pork and new tax cuts. And it looks like the House may finally get on board, too. But the real fireworks aren't in D.C. — they're in the REAL economy. It's looking like a total disaster in the making. Just consider what we learned this week:

• The research firm S&P/Case-Shiller reported that home prices in 20 top metropolitan areas dropped 16.3% from a year ago in July. That was worse than the prior month, when they fell 15.9%, and the biggest drop on record.
• Mortgage applications plunged in the week ended September 26, according to the Mortgage Bankers Association. The purchase index dropped 10.9% from the previous week, while the refinance index tanked 34.7%. At 304.8, the purchase index is the lowest since February 2002.
• The outplacement firm Challenger, Gray & Christmas counted 95,094 job cut announcements in September. That was up more than 7% from August and up 33% from a year earlier.
• Auto sales are down sharply, and industry layoffs are rising ... The layoffs aren't just concentrated at banks and brokers anymore, either. Computer industry players led the list of announced cuts (25,700). Automotive firms were next at just under 15,000, with apparel companies (8,350) and financials (8,244) right behind. Auto sales plunged 27% in September at the six largest automakers. Ford's sales were down a whopping 35%, while Chrysler sales dropped 33%. Car and truck sales have now fallen 11 months in a row, the worst stretch of declines in 17 years.
• The latest personal spending figures from the government showed zero growth in August. Besides this February, we haven't seen a monthly reading that pathetic since September 2006.
• The ISM manufacturing index plunged to 43.5 in September. That was down from 49.9 in August, well below the forecast for a reading of 49.5, and the worst reading since October 2001. Sub-indices that measure new orders, employment and production all tanked.

I could go on, but I think you get the picture ... This is no longer just a housing crisis. It is no longer just a financial crisis. It's a full-scale economic crisis! What's happening as a result? Earnings and sales problems, which were once concentrated in financial firms, are now spreading everywhere. The same tech stocks Wall Street called "safe" (because they weren't in the finance sector) are starting to tank. The big industrials are rolling over. The transports are breaking down left and right. And the bad corporate earnings news is piling up.

Yes, the various government programs to help refinance borrowers out of crummy mortgages — and the $700-billion bailout program — may help a subsector of consumers and banks out there.
But they are not a cure-all. They could actually drive interest rates higher. And even if they manage to forestall some credit market pain, or rescue a few banks from failure, they won't be able to offset the increasing economic pressures being brought to bear on mainstream America."
Written by financial investment advisor, Mike Larson, 10-03-08.