Do you remember your first time in a plane and that uncomfortable feeling when it was just about to take off? It’s picking up speed and soon enough you feel that the ground has been taken from underneath your feet and the plane is rapidly ascending upwards. Well, the CEOs of the major airline companies are probably feeling that same feeling as crude futures shoot up to a fourth straight record this week.

The oil prices just keep rising, setting up new records every week. Crude futures marked the new high of $133.17 a barrel in New York today. But the market closing wasn’t enough to stop the rise and oil continued to surge in electronic trading reaching $134 a barrel. AMR Corp. Chairman and Chief Executive Gerard Arpey:

The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy. Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.

The question is who will the first to respond to a rapidly changing situation on the oil market. While most of the airlines are sitting tight hoping for this to be over soon, AMR Corp. “became the first U.S. carrier to make more moves to deal with still-surging fuel coasts”. According to Wall Street Journal, AMR Corp. is planning U.S. capacity cuts, a retirement of at least 75 aircrafts, and institution of additional passenger fees, including charging fliers $15 for their first checked bag. All measures are being implemented in an attempt to combat rising fuel costs.

However, the market response to the oil prices and new operation changes instituted by AMR sent their shares tumbling almost 15%. The market is not the only one with the negative response to the actions of airline companies. The heavy weight of rising fuel prices on consumers coupled with additional fees for almost any service provided by airline companies make air travel close to becoming unaffordable. As a result, economists expect that the next hit will come from consumers’ side who will switch their preferences to other means of transportation. With the surging operational costs and potential decrease in demand what will it mean for airline industry? What options does it have for bouncing back into the profit maximization game? Small talks about nationalization of the industry can be caught on recent economics blogs. Airlines cry over the surging oil prices: up into the unknown.

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This made the news a while ago, but I wanted to share this clip with everyone. If any of our readers lives in the L.A. area, I’d love to hear about the status of this tent city and whether it has grown or shrunk since this report.

On my next trip to California, I will be sure to visit. Here’s to hoping this is an anomaly rather than a trend.

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As things currently stand, the Fed cares much more about the general economic slowdown and potential recession than about keeping prices in check. That’s not to say that inflation i sn’t important or is being completely ignored by the Fed. Not at all. But for the time being, concerns over inflation are on the backburner in favor of sustaining financial liquidity. That seems to be the Fed’s standpoint.

This approach is easy to see just by following recent movements in interest rates. The Fed has been steadily cutting its benchmark interest from 5.25% to 2% throughout past half a year. And since there is no free cheese, financial liquidity has cost the Fed inflation headaches. However, low interest rates are not the only factor contributing to the risk of inflationary spiral. Surging food and oil prices add their fair share to the problem. Former Federal Reserve Chairman Paul Volcker:

This situation reminds me of the early 1970s when we had explosions in oil prices [and] in food prices against the background of low underlying inflation, and it was not dealt with forcefully because of concerns about the economy.

The release of recent economic data by Labor Department shows that the consumer-price index rose 0.2% in April from a month earlier. These so-called core consumer prices, which exclude food and energy, went up by only 0.1%. Released numbers are below analysts’ expectations. It appears that, without a significant increase in wages, surging oil and food prices decrease consumer purchasing power and as a result restrain inflation.

Were the economists wrong in assuming that the only possible combination of inflation and economic slowdown is stagflation? Is it possible that a decrease in demand due to surging prices for food and oil will keep inflation in check? And if such a restrain on inflation is possible, then for how long?

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Things seem to be calm but tense in the markets. Perhaps no news is good news after all.

• Today, a less than stellar retail sales report has dragged the market down, along with high oil prices and some words of caution from Ben Bernanke. These are the market fluctuations you should expect, though, as the market tries to figure out which direction the economy will go.
• JPMorgan has handed job offers to about 6000 Bear Stearns employees. CEO James Dimon’s basically gone through the first round of job offers, probably giving offers to the high performers and necessary positions. There’s about 14,000 people who worked at Bear Stearns when it crashed, and we all knew this would be coming.

  Oh, and Dimon also predicts that the recession has just begun, even if the credit crunch has passed.

• The automotive industry has not done well in recent years, but GM’s president says the auto industry is absolutely in recession. Both GM and Ford have been pummeled by union contracts, overseas competition, and their inability to predict consumer demand.
• Although the poor shape of the auto industry is no surprise, the decline of the porn industry is. The pornographic industry, usually considered “recession-proof” (did I mention I hate that term?), has dipped nearly 30% in DVD sales. A combination of new internet media and poor market conditions have hit the industry hard, although it has always had the knack for…bouncing back.

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If, as most say, there are no geographical borders for the spread of global trade and economic prosperity, why should it be any different for an economic slowdown? More and more we see in the news how the U.S. credit crunch spreads across the globe as a dangerous economic virus.

Now the consequences of the tight lending, unstable currency, and volatile financial conditions are at the doorstep of Aussie banks.

According to Australia’s Four Pillars policy, the country’s four largest banks are prohibited from merging with one another. However, the restriction did not stop Westpac, one of the top 4 banks in Australia, from approaching the rival lender St. George Bank, fifth largest in the country, with a takeover offer.

If the takeover goes through, it will create the country’s largest financial-services institution with the market capitalization value of 63.7 billion Australian dollars (about $60 billion U.S.). Even though it is expected to be an all-equity deal, The Wall Street Journal reports, the exact value of the offer has not been announced yet.

The takeover is believed to strengthen the Aussie financial industry and help banks to withstand the pressure of spreading credit crisis. From Westpac Chairman Ted Stevens:

“St. George and Westpac are two highly successful banks, but we believe they would be stronger together in a way that allows both to harness the strength of each, while maintaining their unique identities and market positions,”

The ripple effect of the global economic slowdown is hard to prevent. However, the strength and resilience of the economy can be evaluated by the effectiveness of the measures used to combat the problem. Later down the road we will be able to compare recession policies used in US (i.e. cutting rates dramatically) and those used in other countries like Britain and Australia.

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Welcome to the Sunday recession news roundup. Today, we have a theme: frugal consumer spending. How is tightening consumer spending affecting the market, and who are the winners and losers of this change in behavior? Without further ado, the roundup:

• Wise Bread: Does Frugality Hurt the Economy? - Remember those rebate checks? The point was to increase consumer spending, specifically discretionary spending. But most put their rebate checks towards their bills or towards savings, as a part of smarter and more frugal spending. But Brewer asks: Is this hurting the economy? Is it better for us to spend rather than save? In his opinion, there are indeed downsides like less money spent in the economy, but frugal spending causes less fear about recession and more economic stability. His rationale is not all that impressive, but his argument has merit: smarter spending, in my opinion, means more innovation to create smarter, cheaper, and better products. This in turn creates new market opportunities and new job creation. Coupled with less debt, a more frugal economy would be more efficient and more innovative.
• Wal-Mart had a strong report recently, but Target did not. The rationale according to 24/7 Wall Street? Consumers turn to Wal-Mart when they are penny pinching. Wal-Mart indeed seems poised to benefit from a recession. As a result, the stock’s jumped 21% this year.
• Google CEO Eric Schmidt doesn’t think we’re headed for recession. People have asked if the tech sector is “recession-proof” (no, it isn’t), but Google has fared pretty damn well in recent weeks. A good deal of large businesses are not as worried about the economy’s condition as they see positive signs come to light.

Overall, consumers are more pessimistic than businesses over the economy’s condition. That’s why consumers have tightened spending. But certain companies and markets are winners and losers. Internet advertising is a winner (it better targets consumers for cheaper), while traditional print and television advertising is more likely to lose. Wal-Mart and discount chains are winners, while moderate and high-end stores are more likely to be losers. The question is how long consumers will spend frugally and by how much will they change their lifestyle.

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Today, Yahoo! Finance decided to prominently feature this article, an article that makes some interesting points in the debate over whether we are headed towards recession.

Some of the stats:

• The jobless rate dipped from 5.1% to 5% in April. But part-time jobs due to economic reasons (aka people can’t full-time work) rose from 4.4 million a year ago to 5.2 million.
• We’ve lost 260,000 jobs this year.
• Consumer spending has slowed to 1% growth, the slowest since 2001.
• Consumer borrowing grew rapidly in March and continues to grow

As you may have guessed, this analysis of the economy is bleak, and the author’s claim is that the positive signs we’ve seen recently are merely covering up the general weakness of the economy.

I still believe we’re going to have a far clearer picture when we know GDP growth for the April-June quarter. As the market fluctuates, expect the media to overly panic about recession or to overly rejoice about avoiding the bullet.

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Let me cut to the chase. Here’s the headline I woke up to this morning:

Matt Drudge’s affinity for large red headlines makes sure we can’t miss it: We broke a new record!

Oh, great. As a result, the Dow Jones has tumbled about 130 points from this news and the news that insurance giant AIG posted a loss of 7.81 $BILLION. And you thought Fannie Mae was bad. Just as interesting, Exxon Mobile shares have dropped by over 1% in trading as of this post. High oil prices work in their favor, but not exorbitantly high oil prices. At some point, consumers will change their behavior tremendously and there will be major adjustments to be made.

Okay, so we all know that gas prices keep rising and that it’s not good for the economy. But have we thought about the longer term? Philip Brewer of Wise Money has, and reading it might make you shiver. To summarize:

• What if gas prices keep skyrocketing? It was $2.59 per gallon in 2006. It’s nearly $4.00 now. If that trend continued, you could see $10 dollar gas in the nexdt several years. Now, I don’t think that’s likely, but even $5 or $6 gas scares me.
• SUV resale value has plummeted. No surprise there: people are (finally) switching to more fuel-efficient cars.
• It’s time to start planning. How far do you live from work? Is getting a more fuel-efficient car a necessary investment? Should you work remotely?

Oil prices and its rapid inflation worry me greatly. Skyrocketing oil costs could by itself hold the economy back. That reality has even hit Exxon’s stock, which has slid to its lowest level since April. I suggest reading the Wise Bread article and planning for an era of high energy prices. It may just be wishful thinking that the prices will ever drop back down to even $3.00 a gallon.

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The news and blogosphere continue to have an evolving debate over the condition of the economy. Joe Markman at MSN Money and James Pethokoukis of U.S. News and World Report both give optimistic assessments of the economy.

Markman asserts that the economy has not crashed as the bears have feared (i.e. the economy still grew in Jan-March, though only by 0.6%) and that money is flowing back into the economy. Pethokoukis points to statements from the White House’s Chief Economic Advisor Edward Lazear and to Wal-Mart beating expectations as indicators that the economy isn’t going to hell.

Of course, it wouldn’t be a debate without a lot of people claiming the opposite. The Big Picture blog makes the assertion that there’s often positive signals and growth before an economy falls into recession (wait, wouldn’t an economy always grow before it shrank though?). But a far more sobering picture is painted by the Economist of the housing bubble. Here, let me give you a quote from the article:

Mr Bernanke’s maps use figures from the Office of Federal Housing Enterprise Oversight (OFHEO). Its statistics have broad geographic reach and track repeat sales of the same house. The monthly national index suggests average prices have fallen only 3% from a peak in April 2007, and the quarterly figures are still positive. But OFHEO’s figures include only houses financed by mortgages backed by the government-sponsored giants, Fannie Mae and Freddie Mac. They leave out the top and bottom of the market—where prices rose fastest during the bubble and where the mortgage mess was most severe.

The article states that investors expect a 11-13% correction of housing prices (prices will keep dropping and foreclosures will keep rising), but some of the hardest hit states, like California and Flordia, could see another 25%.

Regardless, the debate continues, and we’re not going to know for another 3-6 months what direction the economy will take. Even then, there could always be a sudden nosedive.

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This BusinessWeek article posts some interesting statistics about the job market. Since we’re all busy people, let me summarize the key statistics:

• Consumer spending on goods dropped 2.6% last quarter.
• The Service sector grew 3.5% last quarter.
• The Economy lost 20,000 jobs in April, but the services sector gained 90,000 jobs in April.
• Services and the service sector has grown from 52% of the economy’s GDP two years ago to 60% today. Summary: we’re becoming more and more a services-based economy
• Quote from the article: “This year’s rise in the number of people forced to work part-time is the fastest since the 2001 recession.”

The article basically outlines how the service sector is faring much better than the manufacturing and good sectors and how it’s helping keep the economy from dropping like a stone. The trend is not a surprise, but it does cause concern for the future of the U.S. economy and the viability of an economy that is becoming more and more dependent on services. And more dependent on foreign goods.

Still, as the article states, the economy’s still sliding and many people are snapping up part-time work as jobs become more difficult to come by.

Tell us: Do you know anyone who used to work full-time but is now part-time? And were they in the manufacturing or goods sectors?

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