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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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?
Welcome to hump day! Today’s news cycle has been dominated by the Clinton/Obama race, but that doesn’t mean there isn’t recession-related news to bring to you. Today’s news has been a slew of positive spin. Here’s some of the headlines.
Today’s roundup is unique, because a large chunk of today’s news has been about Fannie Mae. Fannie Mae is one of the giants in the mortgage loan industry, and it posted an abysmal quarterly report today, which is where we’ll begin.
24/7 Wall Street reports the $30 Billion+ company lost $2.2 Billion in the first quarter. It’s even worse if you compare it to last year: It earned $961 million during the same time period (Jan-March). There’s no way to spin this: the report is bad for the conditions of mortgages and is a dark indicator for the economy. Shares tumbled 15% before the open of the markets.
Yet Fannie Mae’s share price jumped 9% today, reports Yahoo! Wait, WHAT? Apparently, the government also loosened restrictions on Fannie Mae (note: Fannie Mae doesn’t loan to home buyers, but buys and sells the mortgages from the banks that give out those loans.) This frees it up to better help stabilize the market, and gives it more leeway.
“We’ve taken tremendous risks by loosening these companies’ purse strings,” said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. “They could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”
Loosen the regulations, increase the risk, increase the reward (or save the economy).
Yes, I am just as confused as you are right now as I try to digest all of the Fannie Mae talk. The truth is that the indicators for the health of Fannie Mae and the mortgage market are mixed, and nobody really knows what will happen. It’ll probably get worse before it gets better, and Fannie Mae may reap some serious rewards from this mess. But if Fannie Mae or Freddie Mac are unable to pay their debts and turn things around, we could have a meltdown far worse than Bear Stearns.
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.
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? 
