Signs of the Economic Apocalypse 11-28-05

From Signs of the Times 11-28-05:

Gold closed at $497.10 an ounce on Friday, up 2.2% from $486.40 at the previous week’s close. The dollar closed at 0.8547 euros, up 0.6% from 0.8495 the week before. The euro closed at 1.1700 dollars compared to $1.1772 at the end of the previous week. Gold in euros, then, would be 424.87 euros an ounce, up 2.8% from 413.18 euros the Friday before. Oil closed at $58.03 a barrel, up 1.4% from $57.21 at the end of the previous week. Oil in euros would be 49.60 a barrel, up 2.1% from 48.60 the week before. The gold/oil ratio closed at 8.57 up 0.8% from 8.50 at the end of the previous week. The yield on the ten-year U.S. Treasury note closed at 4.44%, down six basis points from 4.50 the Friday before. In U.S. stocks, the Dow closed at 10,931.62, up 1.5% from the previous week’s 10,766.33. The NASDAQ closed at 2,263.01, up 2.5% from 2,227.07 the Friday before.

The week ended strong for the U.S. economic numbers partly due to a strong gain in Friday-after-Thanksgiving retail sales over the same day last year:

Weekend Sales Jump 22% to $27.8 Billion, NRF Says

Nov. 27 (Bloomberg) -- U.S. retail sales jumped 22 percent to $27.8 billion during the post-Thanksgiving weekend, as shoppers flocked to stores to buy electronics, clothing and books, the National Retail Federation said.

Shoppers spent an average $302.81, the Washington-based trade group said today in a statement. It said 145 million shoppers went to stores and the Internet, as retailers offered substantial discounts.

The statement followed positive reports from retailers as they offered giveaways and price cuts to generate the 6 percent holiday sales growth forecast by the NRF. Wal-Mart Stores Inc., the world's largest retailer, said yesterday that November comparable-store sales at its U.S. outlets rose about 4.3 percent, helped by a strong start to the holiday shopping season.

“Even though many retailers saw strong sales this past weekend, companies will not be basking in their success,'' said Tracy Mullin, the NRF's chief executive. “Stores are already warming up for the next four weeks because the holiday season is far from over.''

In a separate statement issued yesterday, Visa USA said retail spending on Visa credit and debit cards rose 12 percent on the Friday after Thanksgiving, led by purchases of electronics and computers. Research-company ShopperTrak RCT Corp. said sales on Black Friday were little changed from a record set a year earlier. The day after Thanksgiving got its name because it's when many retailers were said to become profitable for the year.

Consumers were shopping for a variety of merchandise, with the electronics category showing the largest year-over-year jump, the NRF said. About 37 percent of shoppers bought in that category, up from 33 percent a year ago, it said.

Once again, we see generally good short term numbers together with a frightening longer-term situation. Last week, for example, saw the announcement Monday of cutbacks at General Motors of some 30,000 employees. Coming on the heels of layoffs at Ford and the problems of Delphi Auto Parts, it is becoming clear that we are seeing more than just a cyclical downturn in U.S. auto manufacturing, we are seeing the complete restructuring of the economic landscape and of the whole social contract in the United States:

GM job cuts will devastate North American cities

By Joseph Kay and Barry Grey23 November 2005

General Motors’ plan to eliminate 30,000 hourly jobs by 2008, announced Monday in Detroit, will have devastating consequences for cities in the United States and Canada, and its ripple effects will hit working class communities throughout the two countries. The closure of twelve facilities will reduce the auto maker’s manufacturing jobs in North America by nearly a third.

Taken together with hourly and salaried job cuts already announced this year by GM, Ford and the auto parts makers Delphi and Visteon, Monday’s announcement brings the total of auto jobs targeted for destruction to 60,000, and this does not take into account the impact of Ford’s downsizing plan, to be made public in January. The number two US auto maker has made clear that it intends to eliminate thousands of jobs and permanently close a number of factories.

Since 2000, more than 100,000 hourly and salaried automotive jobs have been eliminated in the US. The latest GM cuts are part of a longer-term trend in which corporations have wiped out jobs that once provided a relatively stable livelihood for manufacturing workers. Through major struggles in the 1930s and into the post-war period, workers were able to win concessions in pay and benefits. This was particularly the case in the auto industry.

For the past quarter century, beginning with the Chrysler bailout of 1979-80, the auto companies have been downsizing their work forces, closing plants, and using the prospect of unemployment as a club to impose wage concessions and chip away at health and pension benefits, as well as previously established improvements in working conditions.

They have been assisted by the United Auto Workers union, which has collaborated in the destruction of jobs and the undermining of wages and benefits in order to boost the competitiveness of the US auto companies against their European and Asian rivals.

This process has reached a new stage, marked by the decision of Delphi, which was spun off by General Motors in 1999 and remains GM’s main parts supplier, to file for bankruptcy protection and demand pay cuts of 60 percent. The company is also demanding sweeping cuts in health benefits and pensions, and plans to eliminate 24,000—or nearly two thirds—of its US hourly work force.

…The measures announced on Monday will be only the beginning for GM workers. On Tuesday, the company’s stock fell for the second straight day, as analysts on Wall Street made clear that the cuts would not be sufficient to satisfy banks and investors.

Ron Tadross of Bank of America continued to give GM stock a “sell” rating, saying he still anticipated the company to end up in bankruptcy. John Casesa of Merrill Lynch said, “It will likely get worse before it gets better. We believe GM’s announced restructuring plan is only the first step in the long process.”

The downsizing of the US auto industry has already produced socially catastrophic consequences in parts of the country, particularly in Michigan, the historical center of automobile production. The Detroit Free Press on Tuesday cited an astonishing statistic, noting that, according to US census data, “Michigan’s median household income has fallen by $9,914—19 percent—between 1999 and 2004, more than any other state.”

This figure crystallizes a historic decline in working class living standards—one that precedes the impact of the new and more drastic assault on jobs and wages.
Giving a sense of the mood among GM workers in the region, the newspaper quoted Robert Paulk, an hourly worker at the Tech Center in Warren, Michigan, who said, “There are a lot of people that are really mad. They think this is the thing that revolutions are made of.”

…The city of Flint is slated to lose over 700 jobs with the shutdown of the Flint North engine line in 2008. The Flint North complex once employed 20,000 workers, including the Buick City complex that closed in 1999. The number of active GM workers in the city has declined from a peak of over 80,000 to just a few thousand today.

Flint will also be hit by Delphi’s plans to close its Flint East plant, which employs 3,400 people. The company has already shut down production at its Flint West plant.

Once known as “Vehicle City,” Flint has become a ghost of its former self. Over a quarter of the population, including nearly 38 percent of children under 18, live below the poverty line. The official unemployment rate stands at 12 percent. Both of these figures—comparable to those found in Detroit—understate the devastation that has overcome the city in the past two decades.

Another Michigan city to be hit by the plant closings is Lansing. The Lansing Metal Centre, which employs 1,360, is slotted to be shut down by 2007, and the Lansing Craft Centre, which employs 450 workers, will close by 2007. Nearly 3,000 jobs were eliminated when the Lansing Car Assembly plant was shut down last year.

Also in the Midwest, GM is planning on eliminating the third shift at its SUV plant in Moraine, Ohio in 2006, a move that is expected to cost 1,000 jobs.

Thousands of jobs will be lost in southeastern Ontario, Canada. GM announced that it will close its Oshawa No. 2 plant by 2008, eliminating 2,500 jobs. It will also eliminate a shift at its No.1 plant, leading to a loss of an additional 1,000 jobs. About 140 jobs will be lost with the shutdown of a parts plant in St. Catharines, Ontario.

An article in the Toronto Globe and Mail on Tuesday noted that the entire economy of the region will suffer. “About half of Canada’s critical auto parts industry lies exposed to the shock waves emanating from the planned closing,” the newspaper reported. According to the article, GM contracts are responsible for half of the 100,000 jobs in the Canadian auto parts industry. An estimated 12,000 jobs in the parts industry may be eliminated as a result of the job cuts at GM.

The economic impact will extend beyond these parts jobs to wider sections of the economy. “Jan Myers, chief economist for Canadian Manufactures & Exporters,” the Globe and Mail reported, “estimates that about nine jobs are created directly in Canada for every auto assembly position. That means the sector generates about 20 to 25 per cent of the total jobs in Canadian manufacturing.”

Outside of the US Midwest and Canada, several major plants will be closed in southern states. GM will sharply scale back production at its Saturn plant in Spring Hill, Tennessee, resulting in some 1,500 job losses. Over 2,500 jobs will be eliminated in Oklahoma City, Oklahoma when a plant there is closed in 2006. And 3,000 workers will lose their jobs in Doraville, Georgia, just outside of Atlanta.

Furthermore, it is hard to get too excited about retail sales numbers in the United States when you think about where the money is coming from: unsustainable debt from an inflated real estate market. Here’s Peter Schiff on the housing bubble:

Contributing to the housing mania is the artificial boost to consumer spending (80% U.S. GDP,) the bubble itself has produced. This acts as a self-perpetuating, “virtuous” circle where increased consumer spending drives housing prices higher, which in turn provides the impetus for still more consumer spending. Through the wealth effect, growing home equity both increases the willingness of homeowners to spend while reducing their perceived need to save. The bubble mentality is “why save when my house is doing it for me.” In the past being a homeowner increased the need to save, as inherent in homeownership are costly repairs. Today homebuyers not only do not need any savings to buy a house, they no longer need any to maintain one either. Is it any wonder that our national savings rate is negative, homeownerships so wide-spread, and real estate prices are so high?

The impetus to spend is not simply the result of a state of mind. The ability to cash out equity enables homeowners to convert paper appreciation into real purchasing power. However, since this extra purchasing power was not derived from legitimate increases in American productivity, the result has been a massive, unsustainable, and completely unprecedented rise in our nation’s trade deficit.

In addition, lower interest rates, and the proliferation of adjustable rate mortgages, have allowed homeowners to temporarily suppress mortgage payments, freeing up additional income for discretionary spending. This temporary boost to consumer spending has been a “shot in the arm” to the economy, increasing employment, incomes, housing demand and home prices, enabling additional cash-out refinancing, and thus perpetuating the cycle.

In Europe, on the other hand, consumer spending has begun to fall, as European consumers seem to still have some grasp of reality:

Consumers set to spend less across Europe
By Elizabeth Rigby in London and Ralph Atkins in Frankfurt
November 22 2005

Signs of a squeeze on Europe’s consumers increased on Tuesday as France and Germany reported slowdowns in household spending and a consultancy said retailers faced difficult trading this Christmas.

The figures highlight the fragility of the recent pick-up in economic activity in the 12-nation eurozone and will sharpen concern over the likely impact of the European Central Bank’s signalled interest rate rise.

The bad news for retailers comes in a report from Deloitte, the business advisory firm, which said spending on gifts was expected to dip by an average 3 per cent year-on-year across nine European countries. In Germany spending on gifts was projected to tumble 9 per cent. Of the nine countries surveyed, only in Ireland and Spain are shoppers expected to increase spending on presents.

Gilles Goldenberg, partner at Deloitte, said: “Spending was growing year-on-year until 2003 but since then there has been a change which seems to be turning into a trend. European consumers were told that 2005 would be a good . . . they were sold a recovery that has not taken place. The anticipation for 2006 is gloomy and spending power is perceived to be reduced.”

Mr Goldenberg said Europeans were anticipating a drop in disposable incomes on the back of low wage increases and rising household costs, echoing comments last week by Mervyn King, governor of the Bank of England. He said spending in the UK was being squeezed by higher taxes and the cost of “boring” items such as petrol and mortgages.

In France household spending on manufactured goods fell 0.6 per cent in October against a 0.3 per cent fall the previous month, although overall the three months to September had seen robust growth.

In Germany household consumption fell by 0.2 per cent in the three months to September, the third consecutive quarterly contraction. Erik Nielsen at Goldman Sachs, said: “While companies are cash-rich and boosting profits, real incomes have not seen much improvement and have been hit by higher oil prices. The recovery is really fragile and I can’t really see it taking root across the eurozone without private consumption.”

The European Central Bank’s decision to press ahead with a rate increase next month was indicated by Jean-Claude Trichet, ECB president, last week.
The move prompted speculation that he had been bounced into exerting his authority by signs of disagreement among members of its 18-strong governing council.

Jean-Marc Lucas at BNP Paribas, said French consumption was expected to slow in the fourth quarter. He said that with no sign of an improvement in wages, spending patterns would depend, crucially, on whether consumers used savings instead.

Deloitte’s survey, which covered 7,000 consumers, said 49 per cent of Europeans believed their economies were in recession.

The contrast in consumer psychology between the United States and Europe couldn’t be clearer. European see low wage increases, troubling political storms on the horizon with the French riots, and real danger of a world war breaking out in the Middle East, and they cut back on spending a bit. Maybe they begin to think about using their savings. But Europeans have maintained social memory about real and complete devastation in the twentieth century and have felt an anxious need to save even during good times. United States consumers see widespread wage cuts and the massive export of middle-class jobs yet they are able to increase spending. In the United States, we have gone through our savings a long time ago and have been borrowing on our inflated houses to maintain consumer spending. Oddly enough, this spending in the United States may no longer be based on optimism but on fatalism. Polls have shown that most in the United States think the economy is getting worse and the country is on the wrong track. Why not enjoy things while we can, seems to be the attitude. Fear and uncertainty seem to make Europeans save and North Americans spend. As we saw last week, though, the plans made for the majority of the people on both continents by the elite seem to be the same: serfs in a new, high- tech capitalist feudalism.