A cluster of profit warnings

Rarely a day goes by without one or more household names in the world of business, finance and commerce releasing a profit warning to the city. Listed companies are required to do so - releasing information that might materially affect the market value of their business - but the rash of profit warnings from different sectors of the economy is a reflection of the demand and cost pressures facing private sector companies. The squeeze is on and it will be interesting to see how corporate Britain reacts and responds to these challenging times.

Parcel problems ruffle Rentokil

Starbucks reports falling profits

Bovis sets out new profits warning

Downturn sparks Electrolux loss

Stabilising demand - will the tax rebate work?

It is an interesting case study in how to stabilise demand and output at a time when consumer confidence is declining and the domestic economy has been hit by a sharp negative shock emanating from the housing market. The fiscal rebates will soon be landing in the post boxes of millions of US households ... the key question is how much of a temporary stimulus will this provide for the economy? The Financial Times has a good article on this today.

“The difference depends on how much of the rebate package will be spent and how much will go on imported goods. It is also related to the time-frame over which it is spent, and whether this expenditure will, in turn, trigger knock-on spending ..... In effect the government will nationalise part of US household debt – socialising some of the costs of the economic downturn. In doing so it may reduce the risk of a sudden pull-back in spending by overstretched consumers, even if it does not actually boost spending by much. Analysts estimate anywhere from 20 per cent to 50 per cent of the rebates will be spent over a period of four to six months.”

The impact will depend on the marginal propensity to save and spend the extra income and also the marginal propensity to import goods and services. With a weaker dollar raising the prices imported products, perhaps the propensity to import might be a little lower at this key stage of the economic cycle? The tax rebate is also targeted at Americans on incomes below the top of the pay ladder - whose marginal propensity to spend might be expected to be higher than the super-rich.

According to ABC news:

“More than 130 million U.S. households are eligible for the checks. Individuals could get up to $600, couples up to $1,200 with an additional $300 per child. In total about $120 billion will be doled out over the next two months.”

The rest of the FT article is here

US economy awaits stimulation from Bush’s tax rebate (Guardian)

Revision: Recessions

“What’s the difference between a recession and a depression? A recession is when your neighbour loses their job; a depression is when you lose yours.”

Fed opts to leave a little powder left

It is a sign of the times when a decision to cut (slash) official short term interest rates by 0,75% (taking US rates to 2.25%) comes in below market expectations! The US Fed Reserve has cut the cost of borrowing in a fresh bid to limit the downside risks for the real economy as financial turbulence threatens to dent a huge hole in prospects for the US economy in the coming months. Loads of comment available on this one from virtually every commentator. Evan Davis, the former Economics editor of the BBC was on good form on TV this morning - explaining that cuts in interest rates from the central banks is not really where the problem lies for most consumers. It is the interest rate charged on the lending and borrowing that the banks do between each other which then feeds through into the market for mortgage and other retail loans.

One of the keys to coming out of this crisis will be for banks to recapitalise and improve their own block of funding before they start lending out again. In short, the banks need to attract fresh injections of capital - perhaps from encouraging more of us to save and also from external sources such as the petro-dollars being held by the sovereign wealth funds. Confidence in the different pieces of the financial system is ebbing away - stabilising the markets is the immediate issue and the problem.

Data charts on US and UK interest rates

US_Rate_Cut_March_2008.pdf
UK_Interest_Rates.pdf

Suggested links on the US rate cut

UK Economy in Charts - March 2008

Our monthly streamed chartroom presentation on developments in the UK macroeconomy is now available here and you can also download it as a PowerPoint presentation direct from the website. It might be useful as a revision resource for students studying current developments in the economy at AS and A2 level. The presentation contains 25 data charts current up to the close of the markets yesterday.

1. A slowdown is underway
2. Although purchasers’ demand remains fairly robust
3. Capacity limits have become less of a problem
4. But firms are under pressure to raise prices
5. Export orders are solid – helped by a falling £ - Euro exchange rate
6. Gloom on the high street?
7. And confidence is dropping sharply
8. On more than one measure
9. Most types of consumer borrowing look softer
10. As the housing slowdown deepens
11. A real turning point for residential property?
12. Expectations data says “yes”
13. Business optimism looks fragile
14. But strong profits will be a support in an economic downturn
15. And the weakening £/Euro will boost the UK export sector
16. A slowdown and a weaker currency should help to improve trade
17. Much will depend on the MPC’s scope to cut interest rates
18. And whether cheaper money actually feeds through the system
19. There are inflationary pressures
20. Not least from food
21. The budget deficit is already pretty large 16 years into a recovery
22. And a wider surge in global prices
23. And government spending will not provide much of a ‘real’ stimulus
24. Can the UK avoid stagflation?
25. Yes we can!

Business decisions drive the economic cycle

Bruce Kasman, chief economist at JPMorgan Chase was quoted in an article in the Financial Times last week saying that “recessions are all about shifts in business behaviour.’ The analysis piece was looking at the apparent gap between the dire warnings of recession emanating from the US financial community and the more benign view of the economic landscape coming from the leaders of bricks and mortar businesses.

What are the key business decisions that may decide the extent and duration of the downswing in the US economy in the coming months? Here are five that I can think of, there are bound to be more.