U. S. Economic News Digest
U.S. Current Account Deficit Reaches Record Level
The U.S. current account deficit reached $129.96 billion in the second quarter of 2002, a record, the Department of Commerce reported Sept. 12. The account deficit, which provides further evidence of an irreversible downturn, is mostly driven forward by the growing U.S. trade deficit. Consequently, the United States completely depends on an inflow of dollar-denominated funds from abroad to finance the deficit.
The growing problem is shown by the current account deficit's trajectory: It stood at $95.09 billion in the fourth quarter of 2001, and rose to $112.45 billion in the first quarter of 2002, then, a record before leaping to $129.96 billion in second quarter, an increase of $35 billion. For the first half of 2002, the U.S. current account deficit totalled $242.41 billion, but given its quarterly rate of increase, it is likely that the deficit will soar past $500 billion this year, and with an explosion in the financial system, it could become many times larger.
The largest element of the second-quarter U.S. current account deficit 85% was the trade deficit in goods and services, which reached $110.61 billion. However, there is a secondary, but important factor: the "balance on income," which is the cumulative income that Americans earn on their holdings abroad, minus the cumulative income that foreigners earn on their U.S. holdings.
According to the Commerce Department report, during the second quarter, "foreign-owned assets in the U.S. increased [by] $221.2 billion," representing an inflow of $221.2 billion during that quarter, while they had increased by (representing an inflow of) only $113.5 billion during the first quarter.
While the swelling U.S. current account deficit, and the means by which it is financed, threaten the U.S. financial system, an insane Federal Reserve Board chairman Alan Greenspan told the U.S. Congress in July, that the deficit is "not, in and of itself, a measure of anything bad, because what that means, is that that much money is coming into the U.S. on the part of those who want to invest here."
U.S. Corporate Collapse Continues, Despite Hype about 'Recovery'
The U.S. corporate collapse took another ratchet downward over the past week, giving the lie, once again, to those who still prattle on about the non-existent "recovery." Recent developments include:
*UAL, United Airline's parent, has hired a bankruptcy firm, Rothschild North America, to advise the world's second-largest airline on "what we might do in bankruptcy," if unable to avoid filing Chapter 11, according to chief financial officer Jake Brace.
*AOL Time Warner cut its 2002 sales and profit forecast for its America Online division, because of a drop in Internet advertising.
*J.P. Morgan Chase's stock rating was downgraded by a Merrill Lynch analyst, who said the second-largest U.S. bank may cut its dividend in half, as more telecom and cable companies would not be able to repay their debt.
*Lucent Technologies warned that fourth-quarter sales would drop 20-25% from the third quarter, the sixth straight quarterly decline. And, Lucent is prepared to cut still more jobs, but even so estimates that the per-share loss will be nearly triple that expected.
*Honeywell slashed its profit forecast for the third quarter by about 16%, "because it is clear that the broader economic recovery isn't materializing," said one Honeywell official.
Dow 5,000? So Says Investment Fund Boss
The Dow Jones Index could plunge to 5,000 points about 3,200 points below its current level says Bill Gross, head of the $270-billion Pimco investment fund, the largest bond investor in the world. Only if the Dow should go down to 5,000 points, that is by another 40%, would its stocks be "fairly valued," Gross declared, according to the German daily Frankfurter Allgemeine Zeitung Sept. 9.
Greenspan Threatens Interest Rate Hike; Demands 'Fiscal Discipline'
Federal Reserve Board Chairman Alan Greenspan, in remarks before the House Budget Committee Sept. 12, threatened higher interest rates unless Congress imposes fiscal discipline, which he claimed "worked so well" in the past, to eliminate budget deficits. Greenspan demanded that the Budget Enforcement Act of 1990, which put limits on government spending, be renewed when it expires on Sept. 30.
The Federal budget, he said, should be computed on an accrual basis, not on the present cash-accounting basis (figuring costs only when payments are made).
Babbling on, Greenspan declared that a war on Iraq, if held to about a month's duration, would not have any effect on the U.S. economy, because there would be no oil-price spike.
Wall Street Police Blotter
*Former Tyco CEO Dennis Kozlowski, and ex-CFO Mark Swartz, were indicted on charges of stealing $170 million from the company, and obtaining more than $430 million through fraudulent stock sales. Former general counsel Mark Belnick was separately charged with falsifying business records in order to conceal more than $14 million in improper loans he received from Tyco. The indictment, filed by Manhattan District Attorney Robert Morgenthau, charges Kozlowski and Swartz with "enterprise corruption," grand larceny, and conspiracy, alleging they concocted a plot in 1995 to loot money from Tyco and defraud investors, a scheme called "Top Executives Criminal Enterprise." They face up to 30 years in prison, as well as fines and penalties.
Morgenthau asked a New York State judge to freeze more than $600 million in assets belonging to Kozlowski and Swartz.
The Securities and Exchange Commission charged, in a related civil lawsuit, that the three former Tyco executives failed to disclose tens of millions of dollars in low- or no-interest loans they took from the company.
And Tyco sued Kozlowski, seeking the return of more than $100 million he allegedly stole from the company.
Highest Home Foreclosure Rate in 30 Years
During the second quarter of 2002, nearly 640,000 home mortgages 1.23% of the total home mortgages outstanding were in the foreclosure process, the Mortgage Bankers Association (MBA) reported Sept. 9. This is the highest home-mortgage foreclosure rate since the MBA began keeping records 30 years ago. Moreover, according to the same MBA report, 4.77% of all home loans were at least 30 days delinquent, the highest level since 1985.
Currently, there are $5.757 trillion worth of home mortgage loans outstanding in the United States; Fannie Mae, Freddie Mac, and other secondary housing market agencies have another $5 trillion in housing-related obligations, including mortgage-backed securities/REMICS, for a total of $10.757 trillion in financial paper attached to and propping up the U.S. housing bubble (see June 21, 2002 EIR, "'Fannie and Freddie Were Lenders': U.S. Real Estate Bubble Nears Its End").
For this reason, Fannie Mae and Freddie Mac have worked frantically to prevent a rise in home foreclosures, because once such a process got started, it would threaten the highly leveraged housing bubble. However, that growth in home foreclosures is underway, having risen from a 1.10% foreclosure rate in the first quarter of this year. This is occurring despite Fed chairman Alan Greenspan's move to reduce 30-year mortgage rates to their lowest level in more than three decades.
U.S. Machine-Tool Consumption Enters New Phase of Decline
In July 2002, machine-tool consumption by U.S. industry plummeted by 29.5% from June, to $143.3 million the lowest monthly level since records began in January 1996 according to the American Machine Tool Distributors Association. For the first seven months of 2002, U.S. machine-tool consumption, at about $1.3 billion, plummeted by 23.8% compared to the same period in 2001.
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U.S. Machine Tool Consumption, on an Annual Basis($ billions) |
*** |
1997 |
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5.56 |
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1998 |
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4.91 |
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1999 |
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3.90 |
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2000 |
|
3.99 |
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2001 |
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2.67 |
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Thus, U.S. machine-tool consumption in 2001 was already in a depression, at less than half the level of 1997. Machine tools incorporate into their design the most advanced scientific discoveries, and by transmitting them, increase the productivity of the economy as a whole.
Consumer Debt Skyrockets in July
U.S. consumer debt rose in July at the fastest rate in eight months, with credit card debt accounting for most of the increase, Bloomberg reported Sept. 9. Personal borrowing, excluding mortgages, grew at a 7.6% annual rate, or $10.8 billion, to a total of $1.72 trillion.
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Consumer Debt Outstanding ($ trillion) |
**** |
1997 |
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$1.24 |
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1998 |
|
1.32 |
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1999 |
|
1.42 |
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2000 |
|
1.56 |
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2001 |
|
1.67 |
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|
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Stock Mutual Funds Vanishing as Markets Crash
Since March 2000, some 414 stock mutual funds have been liquidated, which is half of the total liquidations over decades, out of a database of 4,074 stock funds compiled by Morningstar. An additional 566 stock funds merged with others.
Jobless Claims Rise to Five-Month High
New U.S. jobless claims rose to 426,000 for the week ending Sept. 7, the U.S. Department of Labor's Bureau of Labor Statistics reported Sept. 12. This is the highest level in nearly five months. The "consensus of economists" was that the level of claims would fall below 400,000.
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