- The Washington Times - Friday, November 2, 2007

Markets swooned yesterday with anxiety over the Federal Reserve’s decision to refrain from cutting interest rates again despite a new round of economic reports showing that consumer spending and manufacturing pulled back significantly after a major credit crunch in August.

The Dow Jones Industrial Average plunged 362 points on news of the economic weakening in September and October — information that was not available when the Fed made its rate decision Wednesday. Also hurting the markets was speculation about worsening finances at Citigroup and Bank of America and disappointing earnings from Exxon Mobil as profit margins at refineries got pinched by soaring crude oil prices.

Financial companies saw their biggest drop in five years after analysts said Citigroup Inc. may be short of capital, leading the major stock indexes sharply lower. The Dow and Standard & Poor’s 500 Index both fell 2.6 percent.

“The crisis will extend into fiscal year-end” for financial companies, which will be forced to bear more losses and bare them to the markets in the weeks ahead, said David Ader, U.S. government bond strategist at RBS Greenwich Capital. “The spillover to financial sectors is driving up the cost of the credit. … It makes you wonder if the Fed’s move to neutral was a bit premature.”

Only hours after the Fed’s decision, markets were rattled as the Commerce Department provided the first clear evidence that high energy prices and housing worries made a substantial impact on consumers in September, causing them to pare spending to an anemic 0.1 percent pace, after adjusting for inflation, and plump up the savings rate to 0.8 percent.

The abrupt slowdown from robust spending growth of 0.6 percent the previous month paralleled a big plunge in consumer confidence but was obscured in a report showing strong economic growth published by the department Wednesday, which had averaged out the monthly growth rates during the third quarter.

Meanwhile, activity at the nation’s manufacturers slid in September and nearly ground to a halt in October amid the deepening housing and credit woes, according to a survey by the Institute for Supply Management, which showed that exports have become the only remaining strong source of growth for the nation’s industries.

Manufacturing “is right on the edge between decline and growth,” said Daniel J. Meckstroth, chief economist at the Manufacturers Alliance. “The decline in the [ISM’s] production and backlog indexes and increase in prices is worrisome. … The very positive trade picture may be what is keeping the industry’s head slightly above water.”

Bernard Baumohl, managing director of the Economic Outlook Group, said the Fed will be forced to cut interest rates again as the pillars of the economy continue to crumble. He said consumer spending on big-ticket discretionary items such as cars, high-definition televisions and home appliances has particularly weakened in response to the less-conducive financial environment.

“If households are growing uneasy about the eroding value of their homes and higher gasoline and heating oil prices, you’ll first see shoppers pull back on pricey, nonessential durable goods,” he said.

Because consumers fuel 70 percent of economic activity, the cooling trend does not bode well for the economy, he said.

“Remember, it was consumer spending and foreign economic growth that largely fueled U.S. economy activity this year. If Americans start to cut back on spending and foreign economic growth slows before the housing sector has a chance to recover, then this expansion could well be in jeopardy.”

Meanwhile, CEO confidence levels continued to decline last month to the lowest levels since July 2003, Chief Executive magazine reported.

Edward M. Kopko, the magazine’s publisher, said the slide in confidence foreshadows “a potential correction that may be awaiting the stock market, as CEOs’ confidence levels have historically been a lead indicator of how the markets will perform.”

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