U.S. Economy Worsens, Obama Should Focus on Fundamentals

By: Money_Morning

William Patalon III writes: sports, championship-caliber teams all have at least one characteristic in common: They're able to focus on the fundamentals. With the U.S. unemployment rate jumping to its highest level  in a quarter century in February, it's become abundantly clear that that the U.S. recession is much deeper than President Barack Obama anticipated, meaning it's likely that additional measures will be undertaken to arrest the slide and restart growth.

Many experts are now calling for the Obama administration to focus on the fundamentals – fundamental economics, that is. They want him to drop some of its ancillary pet projects – such as healthcare reform – and are telling President Obama to focus all his time and the government's resources on three things:

• Arresting the economy's slide.
• Hastening its subsequent rebound.
• And fixing the U.S. banking system.

A focus on anything else is just a diversion and is a waste of time – especially because  there are questions about just how bad the economy actually is, says John Ryding, chief economist for RDQ Economics LLC in New York.

The Obama administration “should be focused on stabilization [of financial firms] and stimulus – and that should not only be ‘Job One,' that should be the only job right now,” Ryding told Bloomberg Television . “The question is: Is it (a) recession or is it something worse than (a) recession” – like a depression?”

There's definitely a cause for concern: The U.S. unemployment rate jumped to a higher-than-expected 8.1% percent in February, as employers reduced payrolls by 651,000, the U.S. Labor Department said Friday. Job losses have exceeded 600,000 for each of the last three straight months – something that hasn't happened since the government started collecting jobless data all the way back in 1939.

As if that weren't bad enough, consider this: Unemployment has already reached the average rate the White House had projected for the entire year , Bloomberg News reported.

Economists and other experts were already calling for the recession to last longer than had been expected; some are even calling for four more years of pain: a longer recession, followed by slow recovery that could have the malaise afflicting Americans until 2013. [For a related report on these revised views that appears elsewhere in today's issue of Money Morning , please click here ].

Experts don't want the already dire situation to get even worse. But now there's a growing concern that the Obama administration may be trying to do too much, and focus on too much – when the economy and its related ills should be – as Ryding said – “Job One.”

Market Matters

Just imagine what President Obama's approval ratings would be if the country weren't mired in the worst recession since the Great Depression?

With unemployment soaring to its worst level since 1983 and the U.S. Federal Reserve having declared that every sector of the economy is in the doldrums, President Obama moved into the 2nd month of his presidency with 41% of the American people believing that the country “is generally headed in the right direction.”  By comparison, 26% of those surveyed in January (and 12% in November before the election) expressed similar sentiment.

Though the economic data reveals more “challenges” ahead and the markets continue to move to much lower levels, two-thirds of Americans feel “hopeful” about Obama's leadership.  In a small way, these results may be more telling than any earnings or economic report.  Consumer and business confidence will prove keys in moving the country back in the right direction.  Perhaps, these poll results indicate that such “optimism” may be returning to the American mindset (though ever so slowly)? 

Although the administration's $787 billion stimulus plan is designed to save or create a total of 3.5 million jobs, the American economy has already shed 4.4 million jobs since the recession “officially” began in December 2007. And experts say that more declines are coming.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. ( DB ) in New York, is one such expert. In a research note to clients, LaVorgna says he now sees the U.S. jobless rate reaching the 10% level by the end of this year. And he's now abandoned his expectation that growth will emerge in the second half.

“Without any engines of growth, the labor market and the economy are likely to remain depressed for some time,” LaVorgna wrote.
Plunging domestic and overseas demand is inducing such firms as Sears Holdings Corp. ( SHLD ) and General Motors Corp. ( GM ) are stepping up their job cuts.

U.S. stocks posted their biggest weekly decline in three months last week after American International Group Inc. ( AIG ) reported a $61.7 billion loss – the biggest in history – and iconic billionaire investor Warren Buffett said the economy is in a “shambles.”

The Standard & Poor's 500 Stock Index slumped 7% last week, meaning that broad index has plunged 20% since President Obama took office on Jan. 20. The Dow Jones Industrial Average tumbled below 7,000 and never looked back, hitting levels not seen since May 1997.  Other major indexes followed, with the Nasdaq Composite Index plummeting to a six-year low.

The Obama Administration and the Federal Reserve have rolled out two more measures designed to stabilize the credit markets and provide some much needed relief for struggling borrowers. The Term Asset-Backed  Securities Loan Facility is a $200 billion program that will stimulate lending activity for small businesses and consumers.  The $75 billion “ Making Home Affordable ” program is supposed  to assist 9 million homeowners with financial hardships to avoid foreclosure by modifying terms of their mortgages.

How long until Citigroup Inc. ( C ) is listed as a penny stock on the Pink Sheets?  With nationalization talks becoming more prevalent, the one-time banking giant fell below $1 a share last week and its market cap plunged to $5.4 billion (from $270 billion just two years ago).  Speaking of penny stocks, American  International Group Inc. ( AIG ) posted a $60+ billion quarterly loss, the largest in history , and stands prepared to accept another $30 billion in government funds.

US Bancorp ( USB ) and Wells Fargo & Co. ( WFC ) each took measures to shore up their financial positions as both cut their respective dividends by about 85% to a nominal nickel a share. Meanwhile, Wells' management announced an additional $2 billion in expenditure reductions and claimed that the financial institution experienced “strong operating results” in early 2009.  The news outside of financials was not much better.  Computer shipments are projected to decrease by almost 12% in 2009, the worst level of activity ever reported.  Auto sales in February plummeted again and no one escaped the negativity: GM (-53%), Ford Motor Co. ( F ) (-48%), Toyota Motor Corp. (ADR: TM ) (-40%).  GM also seemed to move a few steps closer to bankruptcy reorganization (and penny stock status).  

Volatile oil prices settled above $45 a barrel as traders weighed the dire economic picture against inventory reports that showed an unexpected decline in crude supplies.  Prospects for a new stimulus plan from China brought short-lived optimism , though ultimately the pessimists won out as news about Citi and GM ruled the day.                       

Economically Speaking

With many countries mired in a global recession, China proclaimed that its $585 billion stimulus plan should produce about 8% annual growth for the world's third largest economy.  Outsiders had hoped that China's premier would announce a more robust package, but instead the government has adopted a “wait-and-see” attitude  before determining if any further measures are needed.

Both the European Central Bank (1.5%) and the Bank of England (0.5%) reduced their key lending rates by 50 basis points, dropping those benchmarks to their lowest levels in their respective histories .

The Federal Reserve's Beige Book reported that the prospects for recovery continue to look bleak for the short-term with any “pickup not expected before late 2009 or early 2010.”  Meanwhile, Fed Chairman Ben S. Bernanke confirmed that the recession is worsening as the labor market weakens; he also appeared to support the Obama administration's stimulus package as the best hope to revive the domestic economy.

This week's economic calendar is highlighted by the February retail sales report and some analysts are “cautiously” optimistic (which is really saying something in this environment).  The January report depicted the first monthly increase in seven months and the best showing for retailers in over a year.  After a dismal holiday season, perhaps folks are simply antsy to partake in the “Great American Pastime” of shopping again.

Remember, gift cards purchased for the holidays are still being redeemed and may have contributed to some additional activity last month. 

And with equities facing their lowest valuations in 12 years, some investors may be becoming just as antsy to jump off the sidelines and take advantage of bargain-basement prices. Could this be the week?  Unfortunately, up to this point, there's been far more talk than action.

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