Econowatch

THE BAD NEWS

A vote of no confidence
Are American consumers on their way back to the deep, dark days of last fall? Amid a worsening job market, the University of Michigan consumer sentiment index plunged nearly three points in August to 63.2, its lowest level since March, and not far from the three-decade low of 55.3 reached last November. The decline helped touch off a collapse in global stock markets.

Clunky sales
Despite the US$3-billion Cash for Clunkers program, U.S. retail sales still fell in July, down 0.1 per cent from the month before. Strip out the auto sector, and sales actually fell 0.6 per cent. Economists had been looking for an increase of 0.8 per cent.

Busted up
As Canadians struggle under a mountain of personal debt, a growing number are finding the weight too much to bear. The number of consumers filing for bankruptcy in June was 11,338, a stunning 52 per cent increase over June 2008. The average debt load of those going bust was $36,000.

Piling it on
Good news is often bad news wrapped in a bow. So it is with the surge in demand by foreign investors for U.S. Treasuries. Government debt sales rebounded to $90.7 billion in June. Economists hailed the “market stabilization,” but this just means Washington can pile on more debt, and is a sign of renewed anxiety over the health of the global economy.

SIGNS OF THE TIMES

• If you’re a retailer during a recession, there’s no such thing as too early when it comes to Christmas. Normally, stores wait until at least after Halloween before breaking out the Christmas decorations. Not this year. In the U.S., Sears and Kmart stores have already launched Christmas campaigns, while Toys “R” Us has started selling discounted Christmas toys. At least they haven’t started playing carols.
• If you’re visiting Vermont, you might want to keep an eye out for the Recession Ride Taxi. In this cab, driver Eric Hagen offers a “pay what you want” fare as well as a frequent rider card (pay for seven rides, get one free). This counterintuitive marketing strategy has been a surprising success so far. Hagen says he hasn’t been shorted by his fares and he’s even thinking of expanding his business.
• Reader’s Digest, one of the world’s most popular magazines, said it plans to file for bankruptcy in the U.S. The move is part of an effort to restructure its US$1.6 billion in debt, much of which it accumulated when it was taken private in 2007. The magazine has been losing money for several years, but the recession, which has hit the media industry hard, wiped out any hope of a turnaround.
• The downturn has put a lid on Canada’s thirst for coffee. The Canadian java chain Second Cup said it will close more stores than expected this year (as many as 30 compared to earlier estimates of 20), in an effort to improve earnings. Sales were off nearly five per cent as consumers cut back on discretionary purchases due to the recession, the company said in its latest quarterly results.

LATEST INTELLIGENCE

Exactly how does one go about withdrawing US$1.5 trillion in stimulus money from the economy? We may be about to find out. Last week the U.S. Federal Reserve vowed to wind down its US$300-billion program to purchase Treasuries. The move signalled the delicate first steps of the bank’s stimulus exit strategy, and economists seem nervous.

“Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential.”—Norman Bobins, professor, University of Chicago Booth School of Business and former Fed governor

“It appears that the [Fed] is slowly moving the U.S. economy from the intensive care unit to the recovery suite, where it will nurse the economy back to health.”—Millan Mulraine, economics strategist, TD Securities

“In a way, it’s more of a thumbs-up than if they had said they were continuing the Treasury-buying.”—Edward McKelvey, economist, Goldman Sachs

“We are confident they know how to exit, but a bit less confident that they will do so in a way that prevents inflation from rising in the medium term.”—Dean Maki, economist, Barclays Capital

“Policymakers are damned if they do and damned if they don’t.”—Nouriel Roubini, economist, New York University

“To start the program in the first place was a clear policy error.”—Harm Bandholz, economist, Unicredit Markets

“The Fed can afford to pull in a few life rafts.”—Richard Yamarone, economist, Argus Research Corp.

THE WEEK AHEAD

Friday, August 21: U.S. existing home sales for July will be reported. Sales have been creeping upward in the past few months.

Monday, August 24: Statistics Canada will release retail trade figures for June. Following a surprise jump in May, analysts expect continued growth despite a weak job market and high debt levels.

Tuesday, August 25: The Conference Board in the U.S. will issue its consumer confidence survey for August. Sentiment remains low.