U.S. ECONOMIC/FINANCIAL NEWS
GPD Growth Is Faked, Using 'Hedonic Index' and Zero-Interest Financing
The Commerce Department reported Oct. 31 that inflation-adjusted, real U.S. Gross Domestic Product grew from $9,392.4 billion in the second quarter, to $9,465.2 billion in the third quarter, a supposed increase of $72.8 billion, or 3.1%. But preliminary examination by EIR shows two developments: First, 85% of the alleged GDP growth came from the sales of two items motor vehicles and computers and each of those grew by faked or unsound means; second, there was a sharp cutback in business structures.
First, with respect to GDP:
Motor Vehicles: Motor vehicle sales and production grew as a result of a massive campaign of incentives offered by the major automakers, which included 0% financing, and in some cases, 0% down. For the incentives, the auto companies must pay $1,800 to $2,300 per vehicle, which often causes them to lose money on each vehicle sold on that basis. Further, there is the application of the fraudulent Quality Adjustment Method (QAM), by which, when an environmental feature is added (which is frequently a detraction), it is counted as improved quality. In inflation-adjusted dollars, motor vehicle sales/production increased from $369.1 billion in the second quarter, to $407.1 billion in the third quarter, an increase of $38 billion. That represented 52.2% of the alleged $72.8 billion increase in third quarter GDP for the entire economy.
Computers: In current (non-inflation-adjusted) dollars, computer (and perhipheral) sales rose from $72.8 billion in the second quarter, to $77.4 billion in the third quarter, an increase of $4.8 billion. But when the Commerce Department supposedly corrects the sales figures for inflation, it simultaneously applies the fraudulent hedonic index, which is a variant of the QAM. This artificially swells production. According to the Commerce Department, in "inflation-adjusted" dollars (which incorporates the hedonic index), computer sales rose from $271.6 billion in the second quarter, to $299.9 billion in the third quarter, a supposed increase of $28.3 billion. Thus, by applying the hedonic index (in the process of allegedly correcting for inflation), the Commerce Department took a $4.8-billion increase in computer sales in current (non-inflation-adjusted) dollars, and presto!, turned it into a $28.3-billion increase in inflation-adjusted dollars. By use of the hedonic index, the Commerce Department added a fake $23.5 billion to computer sales. This fake $23.5 billion represented 32.2% of the alleged $72.8-billion third-quarter increase in GDP for the entire economy.
Thus, using 0% financing, and the fraudulent Quality Adjustment Method (inclusive of the hedonic index), combined motor vehicle and computer sales accounted for 84.4% of the American economy's supposed increase in GDP during the third quarter.
At the same time, the construction of non-residential structures (that is, buildings for businesses, factories, etc.), fell on a real, inflation-adjusted basis from $231.7 billion in the second quarter, to $221.8 billion in the third quarter, a fall of $9.9 billion, which on an annualized basis is a fall of more than 16%.
The shape of the real U.S. physical economy is shown by the massive unemployment and the report that new orders for manufactured durable goods fell by 5.9% during September. Announced Oct. 31, the National Association of Purchasing Management's index for Chicago area manufacturing fell to 45.9 in October, the second-lowest level of this year.
The U.S. economic depression is accelerating; trumpeting non-existent growth based on GDP fakery cannot hide that.
Auto Sales Are Harbinger of Tough Times Ahead; Ford Leads the Way; GM Close Behind
Despite the make-believe boost that motor-vehicle sales provided to GDP for the third quarter, October auto sales could fall by as much as 23% over October 2001 when, in the wake of the Sept. 11 attacks, dealers began the 0% financing offers. The 18.4-point dive since January in the consumer confidence perception index, announced Oct. 29 by the Conference Board, is reflected in the slowing car sales. An Economy.com consultant worried that since housing and car sales "have been the only pillars of the economic recovery [sic]," declining sales may be an omen for the whole U.S. economy. A Bridgewater Associates report put it this way: The auto industry "is a ticking time bomb," which is "not just an auto industry problem." Indeed, USA Today reports that car sales are one-quarter of all retail sales. More than 2 million people are employed making and selling cars and trucks in the U.S.A., and that doesn't count the feeder industry employment, so the ripple effect of the downturn will be big. - Ford's Debt Near Junk-Bond Status -
Ford's problems are emblematic of the industry's troubles: On Oct. 25, Standard & Poor's cut its rating on Ford Motor Company's long-term debt to BBB just two levels above junk-bond status. Ford is America's fourth-largest company, with $162.4 billion in revenues in 2001; and is the second-largest auto company in the world, owning Ford, Lincoln, Mercury, Aston Martin, Jaguar, and Volvo, and having a 33% stake in Mazda.
Ford has $162 billion of debt outstanding, of which a staggering $22-32 billion must be rolled over in 2003. Ford's debt is already being treated as effectively "junk status." Ford Credit, which is the financing arm of Ford Motor, has issued 10-year bonds which, because Ford's debt has been devalued, now yield 9.55%. Ten-year U.S. Treasury bonds have a yield of 4.10%; thus, Ford's bonds sell at a "premium" of 5.45 percentage points (545 basis points) above Treasuries of a comparable maturity. The "premium" of Ford bonds is above those of several Third World countries.
Based on its earnings alone, Ford may not be able to pay the interest on its debt. According to Egan-Jones Ratings, a Pennsylvania-based independent credit-analysis firm, in December 2000, Ford's operating earnings were just about double its interest expense. Recently, the credit-analysis firm reported, Ford's earnings are less than half its interest expense.
Ford's approach to this is fierce budget-cutting. Ford's chairman, William Ford, Jr., announced last year that the company would cut $6 billion from expenses, including laying off 30,000 workers. This past week, Ford announced $1 billion more in cuts.
Naturally, this made things worse: In 2001, Ford lost $5.1 billion. For the year-to-date through September, Ford Motor had sold 2.6 million cars and trucks, down 6.8% from the same period last year, despite the incentives and 0% financing offered. Ford has now discontinued many of its incentives, because are losing money for the company. - At GM, Temporary Closings, Zero-Financing -
The slump in market demand has caused General Motors to close an assembly plant for one month, and extend 0% financing in a desperate effort to spur sales, the Wall Street Journal said Oct. 31. All GM factory assembly plants close for two weeks over the Christmas holiday period, but this year GM's Broening Highway plant in Baltimore has been ordered closed for a full month, from Dec. 16 to Jan. 13. The shutdown will affect 1,000 workers of the 1,600 employed at the plant. One GM spokesman attributed the production cut to the sharp decline in sales of its Chevrolet Astro and GMC Safari over the last month, down 32% and 28%, respectively, compared to summer sales. All U.S. automakers will be releasing October sales and earnings figures, which are expected to be down.
Hoping to rev up sales in this climate, GM will offer bigger bonuses to salesmen and dealers and extend the 0% financing offers to Jan. 2, 2003, even though these discounts are cutting deeply into profits already.
Airlines Disaster Spreads to Other Sectors
*Bankrupt U.S. Airways plans to lay off 471 more pilots by May, with 326 of those layoffs coming by Jan. 7, blaming rising fuel costs and continued low number of passengers. The airline, with the new cuts, will have eliminated about 1,800 of the 6,000 pilots it had before Sept. 11, 2001. U.S. Airways also plans to furlough 915 more flight attendants by December, for a total of 3,675 jobs cut since Sept. 11, when it had 10,000 flight attendants. The airline sector, over the past several weeks, "has just completely fallen off a cliff," said CEO David Siegel.
*Goodrich, the biggest U.S. maker of aircraft-landing gear, is slashing 3,200 jobs (up from a previously announced 2,700), in response to having posted a 48% plunge in third-quarter profit, as sales fell 27% in its commercial aircraft business. The aerospace parts maker warned it would look for more ways to cut costs.
*Boeing will cut 1,200 more jobs, on top of the 30,000 jobs that the company had announced it would eliminate by the end of 2002; the cuts are in Boeing's Shared Services Division in Bellevue, Wash., which handles computing, telecommunications, building maintenance and other in-house services.
Workers Pay Cost of 'Shareholder Values'
In their attempt to boost corporate earnings reports, American firms laid off 1.6 million people in the first nine months of this year, the Wall Street Journal reported Nov. 1. This counts only layoffs in companies that laid off more than 50 workers.
"Corporate America has checked itself into the Betty Ford Center for balance-sheet repair and cost reductions," an economic analyst told the Journal. "The only hope they have for restoration of profit margins is to slash costs, and the biggest cost is labor," said this victim of accountant's mentality.
Overall, U.S. unemployment claims rose the last week in October from 394,000 to 410,000.
Increase in Homelessness Shows Depth of Economic Crisis
"Homelessness is on the rise because of the faltering national economy, and some shelter systems and municipal budgets can no longer cope with the demand," the Washington Post reported Oct. 30. Over the last year, the U.S. Conference of Mayors declared that requests for emergency shelter have increased 13% in 27 cities of 100,000 population or more. At the same time, the U.S. Census Bureau reported last month that nation's rate of poverty increased for the first time in a decade.
The article notes that the "compassionate conservative" approach to this growing problem has been to "criminalize homelessness" in a brutal manner. Some cities have removed park benches where the homeless often sleep, others have begun arresting people found lying or sitting on downtown sidewalks. Philadelphia launched an ad campaign urging downtown workers and tourists not to give spare change to panhandlers. And, in San Francisco, where the city has had a liberal policy toward the homeless, and where the homeless rate is estimated at 10,000, a voter initiative, Proposition N (Care no Cash), on the Nov. 5 ballot, calls for cutting monthly cash grants to homeless people from $400 to $59. The savings are supposed to be used for housing and other services for those with no place to live.
City Councilman Tom Ammiano, sponsor of an alternative initiative, Proposition O (Exits from Homelessness), which would protect the cash grants and require the city to create affordable housing and slots in treatment programs for these people, argues, "The homeless should not be scapegoated or dehumanized just because the economy has gone bad."
WALL STREET POLICE BLOTTER
The unravelling of shareholder-value-dominated corporate America continued this past week with announcements of indictments, raids, and broadened investigations into financial malfeasance in U.S. corporate boardrooms.
In a Byzantine sequence of events, the SEC, which is supposed to be cleaning out America's corporate rot, became the focal point for charges of corrupt conflict-of-interest dealings. SEC chairman Harvey Pitt, the highly controversial Bush appointee, in the course of vetting candidates to head the newly Congressionally created Public Company Accounting Oversight Board failed to disclose that former FBI and CIA Director William Webster, who was recently approved by SEC to head the board, had served as chair of the audit committee of U.S. Technologies, an investment firm which is facing shareholder lawsuits alleging fraud. Once Pitt's withholding of this information surfaced, a torrent of conflict-of-interest charges began to fly, leading Pitt to ask the SEC's inspector general to investigate the matter. Democrats, who have been demanding Pitt's resignation, used the revelation to redouble their efforts to have him removed, and, in the meantime, formally asked the General Accounting Office to investigate the events.
Furthermore, Webster himself is now the subject of an SEC probe, according to the Washington Post Nov. 2.
In the ongoing meltdown of the one-time energy giant Enron, former chief financial officer Andrew S. Fastow was indicted in Houston, on 78 Federal counts of fraud, conspiracy, money-laundering, and obstruction of justice. In an early-October indictment brought against Fastow, the obstruction charge was not included. It alleges he "corruptly persuaded" his underling Michael Kopper "to destroy, mutilate and conceal" documents. (Kopper pleaded guilty to fraud and money-laundering charges in August, and is believed to be cooperating with the Justice Department's investigation into Enron.) The indictment also suggests that Enron used a major financial institution to "assist in its financial statement manipulation," which an unidentified Wall Street Journal source speculated is Merrill Lynch & Co.
At the financially troubled telecom giant Lucent Technologies, new speculation was fuelled by a Wall Street Journal muckraking piece that the SEC had expanded its investigation of the company. The allegations, based on unidentified sources, deal with possible earnings manipulations as far back as 1996 and involvement of current or former Lucent board members. If true, such a broadened probe could include U.S. Treasury Secretary Paul O'Neill who was on Lucent's board and audit committee in 1996. He resigned from the board in December 2000 to take his new position in the Bush Administration. Lucent denies it manipulated earnings, and has no knowledge of an expanded SEC investigation.
In California, 40 FBI agents raided and searched offices in a Federal Medicare fraud investigation of two physicians employed by Tenet Healthcare. The FBI search warrant affidavit sought evidence pertaining to a suspected "scheme to cause patients to undergo unnecessary invasive coronary procedures" involving fraudulent Medicare billings. At this time Tenet, one of the largest for-profit hospital chains, is not confirmed to be a target of the investigation, nor is the Redding Hospital, where the physicians had offices. Tenet's share price fell by 26% when news of the raid hit the media.
|