- The Washington Times - Thursday, January 3, 2008

Oil prices touched $100 a barrel for the first time in New York trading yesterday while a key manufacturing index slumped into recession territory — a double blow that sent the stock market skidding.

The Dow Jones Industrial Average lost as much as 270 points on renewed worries about where the economy is headed in 2008, but all the bad news was great for the price of gold, a traditional safe-haven investment that soared above the 1980 record of $850 an ounce to $858.08.

The surge in the price of premium crude, which ended the day just short of $100 at $99.62, sent futures prices for gasoline and heating oil soaring to new records. If wholesale prices stay as high as they are and do not retreat significantly, pump prices already over $3 a gallon will soar into uncharted territory this spring, analysts say.

“Higher gasoline and heating-oil prices are going to cut into consumer spending,” said Andy Lipow, president of Lipow Oil Associates LLC, as well as drive up inflation across a broad spectrum of consumer goods from food to plastics.

Consumers already are registering disgruntlement with high pump prices and home-heating costs in consumer-confidence polls.

The higher costs forced consumers to slow spending during the critical Christmas selling season, when sales gains averaged a tepid 2.4 percent by some estimates — the most sluggish performance in five years.

Consumers power about 70 percent of economic activity, and their endurance is becoming critical as other sectors of the economy succumb to recession. Housing is in its second year of an accelerating retreat, and yesterday a report from the Institute for Supply Management (ISM) showed that manufacturing plunged into recession last month.

“A manufacturing recession has begun, and we feel it is the precursor to a general business recession in the first half of 2008,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance. “The housing collapse, decline in motor vehicle output, record high oil prices, the credit crunch and declining housing prices are enough economic shocks to bring any economic cycle to a halt.”

Manufacturers are suffering not only from a decline in business at home but also from a sharp slowdown in sales overseas. Mr. Meckstroth said flagging exports were the “most disturbing aspect” of the report since foreign trade played a pivotal role in keeping the economy afloat last year.

While manufacturing is foundering, ISM Chairman Norbert Ore said it is too early to say the overall economy is falling into recession. He said the institute’s report only signals recession when the manufacturing index falls below 41.9 for two straight quarters. The index fell last month to 47.7 from 50.8 in November; a reading below 50 signals a manufacturing recession.

“The real question is whether today’s data point to a brief pause in activity or a more persistent trend,” said Stephen Stanley, economist at RBS Greenwich Capital. “We are inclined to wait a month and see what the January figures look like before tossing the manufacturing sector onto the trash heap.”

Markets saw the manufacturing news as an alarming sign that the economy is experiencing a close brush with recession. The Dow ended down 221 at 13,044, its biggest point drop for the first day of trading in a new year. The dollar plunged 1 percent against other major currencies, adding to its 8.3 percent drop last year.

The falling dollar stoked inflation concerns and in turn prompted the surge in commodity prices, causing oil, gold and platinum to all reach record highs. The precious metals are used as hedges against inflation, while oil prices are denominated in dollars and have risen in tandem as the dollar has lost value in recent years.

“Right now, the main reason for the rise in oil prices is the U.S. dollar,” said Qiu Jing, an oil analyst with Maike Futures, although tightening supplies, violence in Nigeria, a key U.S. supplier, and cold weather in the Midwest and Northeast also got some blame yesterday.

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