Wednesday, January 30, 2008

FED MAKES 1/2 POINT RATE CUT

For the second time in eight days the Federal Reserve has moved to cut interest rates, this time trimming 1/2 point from the federal funds rate, which now sits at 3.0%.

The move today means that in eight days the Fed has lowered the federal funds rate by 1.25%. Why? By making these cuts the Fed is using monetary policy to attempt to put more money into the money supply, which should stimulate the economy. The hope is that these moves will help avert, or at the minimum lessen the impact of, a recession.

From The New York Times:

In lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.


From The Federal Reserve Board of Governors:

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.

SLOW GROWTH FOR ECONOMY IN Q4

Gross domestic product (GDP), the total value of all goods and services output inside of the U.S. and a favorite macroeconomic measure of national economic health, grew at 0.6% in the fourth quarter of 2007. Most economists and analysts had predicted growth of over 1%. For reference, the target growth rate in the U.S. is 3% or higher and figures in that range generally indicate a reasonably healthy economy.

From Reuters via The New York Times:

Gross domestic product, which measures total goods and services output within U.S. borders, edged up at a weaker-than-expected 0.6 percent annual rate in the fourth quarter and for the full year advanced only 2.2 percent - the slowest growth in annual GDP since 1.6 percent in 2002.

Analysts surveyed by Reuters had forecast that fourth-quarter GDP would grow at a 1.2 percent rate. The lackluster fourth quarter performance followed a booming third quarter when GDP surged at a 4.9 percent rate and is likely to fuel fears the economy is at risk of tumbling into recession in 2008.

Spending on new-home building plunged 23.9 percent in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5 percent in the third quarter. Over the course of the full year, residential spending fell 16.9 percent, the worst annual performance since 1982.

Monday, January 28, 2008

NEW HOME SALES DROP BY 26% IN 2007

New homes sales dropped by 26% in 2007, the biggest decline since recordkeeping began in 1963.

From The New York Times:

Some economists predict the market may start to recover in the summer. Others are less optimistic. “There is no sign of a bottom in any of these data,” wrote Ian C. Shepherdson, a London-based economist at High Frequency Economics. Last month alone, sales of new homes tumbled 4.7 percent, to a 604,000 annual rate, the smallest monthly sales figure since February 1995.

Prices also fell sharply. In December, the median price of a new home fell to $219,200, down 10.9 percent from December 2006.

CME AND NYMEX IN TALKS

According to published reports, the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX) are in talks about an $11 billion merger that would create a giant energy trading marketplace.

From The New York Times:

In what the two said was a 30-day exclusive negotiating period, the firms said they are discussing a takeover of Nymex by CME. The Chicago exchange would pay $36 in cash and .1323 in CME stock per Nymex share, or about $119.22 based on Friday’s closing price. That represents an 11 percent premium over Nymex’s closing share price Friday of $107.16.

CME will keep Nymex’s trading floors in lower Manhattan and would buy back the exchange’s 816 memberships for a maximum of $500 million.

Both exchanges said that the discussions are early and that any final deal may differ from those terms.

Friday, January 25, 2008

HOME PRICES AND SALES FELL IN 2007

In what some are calling the first housing median price drop since the Great Depression (records don't exist to accurately go back further than the last 1960s), housing sales were down 13% in 2007 - the biggest dip in 25 years. While the percentage drop from 2006 to 2007 was small (1.4%), the pain felt is greater because prices fell dramtically in late 2007. For December, the median price fell a record 6% to $208,400. The median price in 2006 was $221,900.

For more, check out the following article:

Home Sales Plummeted 13% in 2007 - USA Today

Thursday, January 24, 2008

TENTATIVE DEAL REACHED ON STIMULUS PACKAGE

Although details may change as the Senate gets involved, it seems that House leaders have reached agreement on their economic stimulus plan, a plan President Bush supports.

From The New York Times:

House leaders and the White House on Thursday announced a tentative agreement on an economic stimulus package of roughly $150 billion that would pay stipends of $300 to $1,200 per household, and more for families with children, plus provide tax incentives for businesses to encourage spending.

The president and the speaker both described the accord as embracing the basic precepts of their respective parties. Mr. Bush called it “a powerful and effective way to help taxpayers and businesses” by letting people keep and spend more of their own money.

Ms. Pelosi said the package was aimed at the middle class “and to those who aspire to be in the middle class.” She described it as “timely, targeted and temporary — that was our standard.”

Senator Harry Reid of Nevada, the Democratic majority leader, said minutes after the announcement that he was pleased an agreement had been reached, and that he wanted a package ready for Mr. Bush by the time Congress recesses around President’s Day. But he said senators would “work to improve the House package” through the addition of unemployment benefits and other items.

Late in the negotiations that preceded Thursday’s breakthrough, Ms. Pelosi agreed not to include two proposals that have broad support among Congressional Democrats: an extension of unemployment benefits and a temporary increase in food stamps.

In exchange for those concessions, the Bush administration and House Republicans agreed that the stipend of at least $300 would be paid to all workers who earned at least $3,000 last year, even those who did not earn enough to pay taxes.

Tuesday, January 22, 2008

ASIAN MARKETS ENDURE SECOND DAY OF HUGE DECLINES

From The New York Times:

Markets in Tokyo, Hong Kong and Sydney all fell farther in late trading Tuesday than they had all day on Monday. The Hong Kong market plunged another 8 percent by late afternoon after tumbling 5.49 percent on Monday. In Tokyo, the Nikkei dropped 5 percent, hitting a low not seen since September 2005 and facing its worst two-day drop in 17 years on concern global growth is faltering.

While Asia has been less buffeted by the credit crisis than Europe, the Bank of China now appears vulnerable, with analysts predicting it will have to write-down the value of its American mortgage holdings.

Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan’s chief strategist in Asia. But now, he said, many believe “there’s no debate about it.” The only question, he added, is “how long and deep” a recession might be.

In Japan, which may be facing a new recession of its own, most indexes were off Monday by more than 3 percent .

FED MAKES EMERGENCY 3/4-POINT RATE CUT

The Federal Reserve made their first emergency rate cut since September of 2001 and the largest cut since 1984 this morning.

From The New York Times:

“It’s a once-in-a-generation event,” said Mark Zandi, chief economist at Moody’s Economy.com. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest short-term cut since October 1984.

In a statement Tuesday morning, Fed officials said they made the decision to lower rates after “a weakening of the economic outlook” and noted that “broader financial market conditions have continued to deteriorate.”

Saturday, January 19, 2008

USING MONETARY AND FISCAL POLICY TO STIMULATE THE ECONOMY

With most economic indicators heading south, there is little debate that the country is headed for a slowdown or even a recession. To stimulate the economy and lessen the impact of any downturn, the government is prepared to use two weapons: monetary policy and fiscal policy.

Monetary policy is controlled by the Federal Reserve, the United States' central bank. The idea behind monetary policy is that the Fed can increase or decrease the supply of money in the economy. If the economy is overheating and/or inflation is a worry, the Fed can decrease the supply of money in the economy, slowing the economy down to a more acceptable level. This is considered a restrictive or contractionary monetary policy. If the economy is sluggish, as is the case now, the Fed can increase the money supply in the economy. While there are several ways this can be done, none gets more attention than the lowering of key interest rates, which the Fed has done recently, and is expected to do again very soon. So, while there may be debate about whether the Fed acted in a too-little, too-late fashion, there can be no argument regarding the Fed's actions being consistent with an attempt to stimulate the economy, which is called an expansionary monetary policy.

Fiscal policy concerns governmental revenues, which are primarily taxes, and expenditures. Fiscal policy is controlled by the president and congress. Neither usually get to dictate a preferred policy, but rather must work together through compromise to establish a tax and spending program. During an economic downturn, as we are experiencing now, fiscal policy can be used to stimulate the economy. How? Typically by some combination of cutting taxes, tax rebates, and governmental spending, all designed to put money into the pockets of consumers and businesses so that they will spend, spend, spend. The more and the faster they spend, the less likely a downturn will continue or worsen.

President Bush is working on a stimulus plan to put approximately $150 billion into the economy, which is roughly 1% of GDP. Democrats agree that a stimulus plan is needed, but there is disagreement about how to tailor such a plan. Democrats want tax rebates for most Americans combined with one-time increases in programs such as food stamps, unemployment benefits, and home heating assistance for the poor. President Bush wants a tax relief-only plan that gives $100 billion to individuals and $50 billion to businesses. Both plans would likely provide needed relief and stimulate the economy. Now, it is up to our governmental leaders to compromise on a plan that both they and the American people can live with and benefit from.

For more information on the fiscal stimulus plans being developed, check out the following articles:

BUSH PUSHES $150B ECONOMIC AID PACKAGE - AP via Yahoo

BUSH PROPOSING $145 BILLION PLAN TO SPUR ECONOMY - The New York Times

TAX REBATES SEEN AS ECONOMIC STIMULUS - USA Today

MINNESOTA HOSPITAL OPERATOR BANS GIFTS FROM DRUG COMPANIES

Do gifts from drug companies, both large (trips to exotic destinations) and small (pens and notepads), influence doctors to prescribe medication from the gift-giving companies? A 2006 article in the Journal of the American Medical Association states that even small gifts can affect doctor's prescribing decisions.

What can be done to minimize or eliminate this seemingly unethical effect? A Minnesota-based hospital operator, SMDC Health System, instituted an aggressive policy that bans all gifts from drug companies to doctors and went even further by ordering that all gifts including pens, notepads, and coffee mugs be purged from the hospitals.

From AP via Yahoo:

When a Duluth-based operator of hospitals and clinics purged the pens, notepads, coffee mugs and other promotional trinkets drug companies had given its doctors over the years, it took 20 shopping carts to haul the loot away.

Trinkets, free samples, free food and drinks, free trips and other gifts have pervaded the medical profession, but observers say that's starting to change.

"We just decided for a lot of reasons we didn't want to do that any longer," Dr. Kenneth Irons, chief of community clinics for SMDC, said Friday.

So SMDC put together a comprehensive conflict-of-interest policy that, among other things, limits access to its clinics by drug company representatives. Employees suggested the "Clean Sweep" trinket roundup, Irons said.

Many of SMDC's items will be going to the health system of the Evangelical Lutheran Church of Cameroon, which has three hospitals, and several rural health centers.