From Volume 5, Issue Number 27 of EIR Online, Published July 4, 2006

U.S. Economic/Financial News

Fed's Soft-Pedalling on Interest Rates Sets Commodities Inflation Jumping

After significant "guessing" in the banking community that the Federal Reserve would accelerate its interest rate hiking this week, the Fed instead on June 29 raised interest rates one-quarter point to a 5.25% overnight loan rate, and 6.26% discount rate. Whereas JP Morgan Chase and other "analysts" had worried that the Fed would raise its 2006 target for interest rates to 6%, its statement after its meeting does not appear to be a change from Fed chairman Ben Bernanke's earlier statements:

"Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.... Inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

The impact of the non-action was that commodity and stock prices jumped up in the afternoon; gold was up 2%; copper jumped 5%; oil almost reached $74/barrel; and so on.

The central banks remain in the jam Lyndon LaRouche defined: wanting to damp down hyperinflationary markets, but afraid of crashing the housing bubbles overnight, and ruining the (already bankrupt) banks.

Slide in U.S. Auto Sales Accelerates

In another sign of the downward plunge of the economy, forecast June 28 that total U.S. auto sales through the end of the month would be down 2% from the first-half 2005, and that "Big Three" sales would be down 8%. But sales for June alone are forecast at a much larger 8% drop from June 2005—for all automakers. So the drop is accelerating. Not surprisingly, Standard & Poors has cut both GM's and Ford's credit ratings again in the past week, to six levels deep in junk, days after it cut GM's rating to seven. There is only one level worse than that. But on June 28, it was William Ford III's turn to deny that his company would be going into bankruptcy.

The elementary fact is that both companies are shrinking rapidly, and their U.S. sales are slipping more and more sharply, while their debt burdens remain at least in the $300-billion range combined.

Will Arcelor-Mittal Cartel Shut Down More U.S. Steelmaking?

There are a number of indications that the Arcelor-Mittal merger—should it go through—would result in the shutdown of still more U.S. steel operations as part of its global "consolidation," which would constitute a further threat to U.S. national security.

* On Public Radio International's Marketplace June 26, Stephen Beard reported from London that steel customers won't be celebrating, because, "Arcelor-Mittal meanwhile might sell off some American steelmaking operations to cut its exposure to the troubled U.S. auto industry."

* Mittal currently has a commitment to sell its Canadian Dofasco steel-producer to Germany's ThyssenKrupp, to which Arcelor is objecting, since Arcelor wants to keep it. Dofasco also has plants in the U.S.

* Under the terms of an agreement reached with the U.S. Justice Department in May, Mittal is required either to sell Dofasco, in the event of a merger with Arcelor, or to divest other U.S. assets. "The [Justice] Department will continue to investigate the competitive implications of the combination of Mittal and Arcelor—the world's two largest steel producers," the DOJ said on May 12.

* According to the Baltimore Sun June 26, the Sparrows Point steel mill in Baltimore (formerly Bethlehem Steel), is one of the facilities that Mittal may have to divest for anti-trust reasons.

Inventory of Unsold Homes Rose in May to Nine-Year High

Sales of existing homes slid 1.2% in May, the second consecutive monthly drop, according to the National Association of Realtors. Also, USA Today reported June 28 that sales declined 6% from January to May, with single-family homes posting the biggest drop in 11 years. There were a record 3.6 million homes for sale at the end of May, representing a six-and-a-half-month supply, the highest level since May 1997. Mortgage interest rates rose to an average of 6.86%, the highest level since April 2002, creating a "ticking time bomb" for borrowers with adjustable-rate mortgages.

Meanwhile, contract-cancellation rates are increasing, warned the chief executive of luxury-home builder Toll Brothers, who pointed to a "retreat" by speculators in Washington, D.C. and Northern Virginia.

National foreclosures jumped 28% in May compared to a year ago, and up 2% from April, said RealtyTrac.

Michigan: Former Industrial State Faces Economic Extinction

Here are some telling economic statistics for the once-great industrial state of Michigan, home to the Big Three auto companies, as reported in the Detroit News June 27:

* Michigan lost 17,000 jobs in 2005; some 290,000 since 2000.

* Over 33,500 foreclosures were initiated in 2005. Its foreclosure rate was 2.5%, while that for the nation was 1.6%.

* Jobless rate fell to 6% from 7.2% because 66,000 people left the labor pool.

* Family income growth—3.2%—was higher than only two other states: Washington State and Louisiana. Median income has declined 8.2% in Michigan, while the nation's has increased 9.1%.

* Only North Dakota has lost more residents than Michigan.

* Bankruptcy filings are 1.14% for the state, compared with .88% for the nation, while house values have appreciated more slowly than in any other state, at 3.8%. The national average was 13%.

Senate Committee Blames Speculation for Rising Oil, Gas Prices

The Senate Subcommittee on Investigations issued a bipartisan report blaming speculation for rising oil and gas prices, according to a press release from the office of Sen. Carl Levin (D-Mich). The report, released by Sens. Levin and Norm Coleman (R-Minn), concluded that "market speculation has contributed to rising oil and gas prices, and that too many energy trades are occurring without regulatory oversight." The study "recommends that Congress enact legislation to close a major loophole in Federal oversight of oil and gas traders, slipped into law in 2000 at the behest of Enron and other large energy traders."

Levin, the panel's top Democrat, insisted, "It's time to put the cop back on the beat in our major energy markets. More and more trading is being conducted by large oil and gas traders on electronic markets where there is no oversight."

Subcommittee chairman Coleman, breaking ranks with fellow conservative Republicans, said, "The question is whether we have allowed this sector to play by the beat of their own drum—going virtually unchecked and unregulated. We need to take a hard look at whether we have enough regulatory tools."

The report demolished the "supply and demand" myth often given as the reason for high prices, noting that oil inventories recently hit an eight-year high. Rather, speculators have poured tens of billions of dollars into the energy commodity markets; this speculation has "significantly" raised the price of oil futures, by as much as $20-25 per barrel.

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