Signals point to 'faltering' economy

• Article
• Comments ()
• Click-2-Listen
• Videos

By

Signs that the economy is on shaky ground piled up yesterday as it became apparent that consumers, reacting to the housing mess and gas prices above $3 a gallon, slashed their Christmas spending and major losses prompted more foreign bailouts of Wall Street titans Citibank and Merrill Lynch.

The Dow Jones Industrial Average plunged 277 points to 12,501, nearly 12 percent below its October high, on renewed worries that the last and most important prop for the economy — the insatiable American consumer — has finally succumbed to accumulating pressures.

The burden of sharply higher food and energy prices was highlighted in a report from the Labor Department showing a 6.3 percent jump in wholesale prices last year — the biggest in 26 years.

The surge in inflation swamped consumers' purchasing power, forcing them to pull back on spending and sending retail sales plummeting 0.4 percent in December, the Commerce Department said. For the month as well as for all of 2007, sales were the worst since 2002, when the economy was struggling to recover from a recession.

"A faltering consumer will lead to a faltering economy," said Dan North, chief economist at Euler Hermes, a trade credit provider.

"The economy's sinking fast," said Bernard Baumohl, managing director of the Economic Outlook Group. The "dismal" retail-sales figures showed that consumers have particularly cut back on discretionary purchases such as electronics, clothing and sporting goods, as well as home-related spending such as appliances, furniture and building materials.

"I suspect the recession camp probably found new converts this morning," he said. As a measure of how beleaguered the consumer has become, he noted that the full-year sales increase of 3.5 percent for "core" purchases outside of gas and autos likely was smaller than the rise in consumer prices — meaning that "real" sales adjusted for inflation did not increase at all during 2007.

Mounting losses at major banks added to the grim economic outlook because banks are being forced to cut back on lending to consumers and businesses in an effort to conserve their capital and stave off insolvency.

Citigroup shook the markets by reporting a nearly $10 billion loss for the fourth quarter, layoffs of 4,200 employees and another $18 billion in write-downs for bad loans. The bank said its sagging balance sheet will be bolstered by an additional $7 billion capital infusion from a sovereign wealth fund in Singapore as well as Kuwaiti and Saudi Arabian investors.

Merrill Lynch, which is expected to announce further large losses later this week, raised capital by selling $6.6 billion in preferred shares to two state-run funds — the Kuwait Investment Authority and the Korean Investment Corp. — and a Japanese investment bank. The latest bank infusions from wealthy foreigners brings the total to nearly $60 billion.

"Banks are facing the worst financial crises since the Great Depression," Mr. Baumohl said. "The credit markets are frozen. Household income is failing to keep pace with inflation. Home prices have fallen more than 6 percent over the year, and stocks have already lost 5 percent of their value in the first two weeks of 2008. This is hardly an environment that can sustain economic growth."

Harm Bandholz, economist at UniCredit Markets, said the drop in retail sales during December was not as bad as it seemed because it partly reflected inaccurate seasonal adjustments by the Commerce Department, which did not take into account the early pre-Thanksgiving start of the Christmas selling season.

"Sales were overstated in November and understated in December," he said. November sales were up by 1 percent. But even taking that into account, he said, the December decline was "a good taste of upcoming weakness" in consumer spending, which he predicted would rise at less than a 1 percent pace in the first half of this year.