Ali’s blog

Mostly quant stuff with occasional digressions

Corporate America braced for recession

Posted by alifinmath on January 30, 2008

In the FT today:

QUOTE

Leading US companies are shifting into recession mode and preparing to cut costs, freeze hiring and reduce capital spending as they brace for an economic slowdown, senior executives and industry experts said.

Business leaders say rising oil prices, sagging consumer confidence and the on-going credit crunch are prompting them to put in place contingency plans to protect against the expected economic downturn.

UNQUOTE

And from Robert Reich (Secretary of Labor in the Clinton administration), also in the FT:

QUOTE

America’s middle classes are no longer coping

Ben Bernanke and the Federal Reserve have reduced interest rates another three-quarters of a point. But none of these fixes will help much because they do not deal with the underlying anxieties now gripping American voters. The problem lies deeper than the current slowdown and transcends the business cycle.

The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then: the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years now, America’s middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences.

The first coping mechanism was moving more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970 – from 38 per cent to close to 70 per cent. Some parents are now even doing 24-hour shifts, one on child duty while the other works. These families are known as Dins: double income, no sex.

But we reached the limit to how many mothers could maintain paying jobs. What to do? We turned to a second coping mechanism. When families could not paddle any harder, they started paddling longer. The typical American now works two weeks more each year than 30 years ago. Compared with any other advanced nation we are veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there is also a limit to how long we can work. As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time. With housing prices rising briskly through the 1990s and even faster between 2002 and 2006, we turned our homes into piggy banks through home equity loans. Americans got nearly $250bn worth of home equity every quarter in second mortgages and refinancings. That is nearly 10 per cent of disposable income. With credit cards raining down like manna, we bought plasma tele­vision sets, new appliances, vacations.

With dollars artificially high because foreigners continued to hold them even as the nation sank deeper into debt, we summoned inexpensive goods and services from the rest of the world.

But this final coping mechanism can no longer keep us going, either. The era of easy money is over. With the bursting of the housing bubble, home equity is drying up. As Moody’s reported recently, defaults on home equity loans have surged to the highest level this decade. Car and credit card debt is next. Personal bankruptcies rose 48 per cent in first half of 2007, probably even more in the second half, which means a wave of defaults on consumer loans. Meanwhile, as foreigners begin shifting out of dollars, we will no longer have access to cheap foreign goods and services.

In short, the anxiety gripping the middle class is not simply a product of the current economic slowdown. The underlying problem began around 1970. Any presidential candidate seeking to address it will have to think bigger than bailing out lenders and borrowers, or stimulating the economy with tax cuts and spending increases.

Most Americans are still not prospering in the high-technology, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a small number of people at the very top.

UNQUOTE

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2 Responses to “Corporate America braced for recession”

  1. Anonym said

    Not to worry, we can always kill “forners” and TAKE their resources. That is to say, we can expand that current endeavor called the “War on Terra” to Iran (for starters.)

  2. alifinmath said

    That would be nothing new. The present world system is based on violence at its very heart. And it’s not the Americans who started this — though they get all the flak from critics today as they’re currently the 800-pound gorilla.

    The origins of modern capitalism lie in pillage and plunder, which arguably acquired a global basis when the Portuguese and Spanish arrived in the New World. And even then, the justifications were always humanitarian and dressed in the language of universalism (and remained so for all the centuries afterwards) though the real purposes were always sordid. A nice little book on the subject is Immanuel Wallerstein’s “European Universalism,” published by The New Press. A very brief review of the book can be found here:

    http://www.thenewpress.com/index.php?option=com_title&task=view_title&metaproductid=1365

    The idea of war and invasion as being a solution to domestic problems has a long pedigree. Hitler attempted exactly the same thing himself (though it goes back much further, maybe millennia — how about the Punic Wars?).

    The one sector of the post-WW2 US economy that has done well in good times and bad in the USA is the component dealing with military contracts: Bush, Cheney, Rumsfeld, Perle, and their associates are heavily involved in this (for more, see Naomi Klein’s “The Shock Doctrine”). But militarism serves the ends of corporate America as a whole as well. I’m reminded of Maj.-Gen. Smedley Butler’s tract, “War is a Racket,” which is now available online:

    http://www.ratical.org/ratville/CAH/warisaracket.html

    Fot those who haven’t read it, I urge them to at least glance at it. How little the world changes.

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