Layoff Plans Soar

According to Challenger Layoff plans jump 44% to 70,672.

Job reduction announcements by major U.S. corporations soared by 44% to 70,672 in April after falling to an eight-month low in March, according to a monthly report released Wednesday by outplacement firm Challenger Gray & Christmas.
Layoff plans were up 18% compared with April 2006. It's the first time since September that layoffs rose on a year-over-year comparison.

The job cuts in April were led by Citigroup which announced plans to eliminate 17,000 positions. With 33,789 reductions in April, the financial sector has now announced plans to cut 50,221 jobs so far this year, overtaking the auto industry as the top job reducer.

In April, the top industries for job reductions were financial with 33,789, government with 5,643, autos with 4,089, industrial goods with 3,968 and consumer products with 3,391.

In a separate report, a survey of worker confidence showed employees growing slightly more uncomfortable about their personal finances. The Hudson employment index, based on interviews with 9,000 workers, fell to 107.5 in April from 109 in March. Workers were also more dissatisfied with their jobs.

ADP estimates 64,000 private sector jobs for April

The official numbers are out on Friday but ADP is reporting now U.S. job growth weakest in nearly four years.

U.S. private-sector jobs increased by 64,000 in April, the weakest job growth in nearly four years, according to the monthly ADP employment report released Wednesday.

"This is a sluggish type of number," said Joel Prakken, chairman of Macroeconomics Advisers LLC, which produces the report for Automatic Data Processing Inc. After adding in some 24,000 government jobs created in a typical month, the ADP report suggests nonfarm payrolls grew by about 90,000 in April, a bit lower than the 100,000 estimated by economists surveyed by MarketWatch.

Service-sector firms added about 106,000 jobs, while the goods-producing industries cut 42,000, including 20,000 in manufacturing. Goods-producing industries include manufacturing, mining and construction.

The 22,000 jobs lost in goods-producing industries excluding manufacturing (mostly construction) are the largest since November 2001.

The ADP report shows a decline of 45,000 construction jobs in the past three months, in contrast to the Labor Department's figures showing a gain of 29,000. Prakken said he wouldn't be surprised if the government numbers are revised lower to match his.

In April, small businesses created 45,000 jobs, medium-sized firms created 29,000 and large businesses shed 10,000 jobs, according to ADP. Large companies haven't added to their payrolls since November.

The ADP report is designed to mirror the monthly nonfarm payrolls report released by the Labor Department on Friday. One difference: the Labor Department statistics include government jobs, but ADP doesn't.

The April release marks the one-year anniversary of the ADP's public rollout. After a few big misses compared with the Labor Department figures in its first few months, the methodology for the ADP report has been tweaked and the sample size increased.

ADP's numbers at least make sense. Perhaps those methodology revisions helped. With housing as poor as it has been and capital spending declining, it is far more likely that we lost 45,000 construction jobs in the past three months as ADP estimates than added 29,000 construction jobs as the Labor Department's figures show.

IBM Announces Job Cuts

IBM hopped on the bandwagon announcing a cut of 1,315 US jobs.

The world's largest technology services company, is cutting 1,315 services-related jobs in the United States, a union trying to organize IBM workers said on Tuesday.

"We're putting in place a series of actions to address our U.S. cost base, including a basic focus on resource and cost management disciplines and rebalancing of resources as we execute our global resource strategy," Chief Financial Officer Mark Loughridge said on a conference call with analysts on April 17, according to a transcript of the call.

Loughridge said in April that IBM's first quarter was "noticeably weaker" in the United States, especially in the industrial, financial services and communications industries.

The job cuts follow an IBM announcement on Monday that it planned to hire 500 people at a new customer call center in Daleville, Indiana, through 2010.

Gap Considers Sizable Layoffs

Reuters is reporting Gap is considering layoffs to cut costs

Clothing retailer Gap Inc. is considering sizable layoffs over the next few weeks to cut costs, the New York Post reported on Wednesday, citing three people familiar with the situation.

The job cuts would occur at all levels of the company, which employs 150,000 people, as its seeks to eliminate a stifling bureaucracy, the paper said.

Intel Announces Mass Layoffs

The WSJ is reporting Intel To Cut More Than 1,000 Jobs At New Mexico Plant

Intel Corp. (INTC) said Tuesday that it expects to cut more than 1,000 jobs at its Rio Rancho plant as the company ends production of an older silicon wafer technology.

Intel will stop making the 200-millimeter wafers at the plant by the end of August, and affected employees will be offered severance packages ...

Pending Home Sales at 3 Year Low

U.S. pending home sales fell 4.9% in March and the Realtors' market-activity index hit a three-year low.

The group's pending-home-sales index declined 10.5% from March 2006 and sits at its lowest level since March 2003.

David Lereah, the NAR's chief economist, predicted that home sales will be "relatively sluggish" in the second quarter but that a "modest uptrend" is on the horizon for the second half of 2007.

"Although the weather improved in March, we're starting to see the effects of a decline in subprime lending and tighter lending standards," Lereah said in a news release.

Ian Shepherdson of High Frequency Economics said the drop was a big surprise.
"This is much worse than we expected," Shepherdson said in an e-mail. "The warm March weather ought to have persuaded more people to go house-hunting, and that in turn ought to have increased the number of contract signings, which is what the pending-sales index measures."

A home sale is listed as pending when the contract has been signed but the transaction has not closed. Such a sale is usually finalized within one or two months of signing.

Are corporations are finally getting the message that housing is not going to recover? It seems like it. Capital spending has been falling like a rock and now we are seeing year over year increases in mass layoff plans.

Weak jobs beget weak consumer spending and a weakening GDP. Weak spending begets weak hiring. The cycle down is just starting and the falloff in capital spending in the face of a continued decline in housing seals the fate. Once again Lereah is on the wrong side of the fence predicting a "modest uptrend" in housing for the second half of 2007. With the debt side of the balance sheet sitting where it is, it is likely that consumers have never been less prepared for the recession that is about ready to hit them smack in the face.

This post originally appeared in Minyanville. Also on Minyanville today, Kevin Depew talked about yacht sales and the Baltic Dry Index in "5 Things You Need To Know". Yacht sales are way up and car sales are way down. If that is not a sign of our dual economy what is? I will have more on car sales tomorrow.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Economic Ramifications of Iraq

Like it or not, it is pretty hard to find much of anything good to say about Bush's war program. That is a simple statement of fact and not even a political one at this point.

When you have an active-duty officer criticizing handling of Iraq war something serious is up.

An active-duty U.S. Army officer has taken the unusual step of openly criticizing the way generals have handled the Iraq war, accusing them of failing to prepare their forces for an insurgency and misleading Congress about the situation here.

"For reasons that are not yet clear, America's general officer corps underestimated the strength of the enemy, overestimated the capabilities of Iraq's government and security forces and failed to provide Congress with an accurate assessment of security conditions in Iraq," Lt. Col. Paul Yingling wrote in an article published Friday in the Armed Forces Journal.

"In 2007, Iraq's grave and deteriorating condition offers diminishing hope for an American victory and portends risk of an even wider and more destructive regional war," he said.

Several retired U.S. generals have delivered similar criticism, questioning planning for the Iraq conflict as well as the management competence of former Defense Secretary Donald Rumsfeld.

But public criticism from an active-duty officer is rare and may be a sign of growing discontent among military leaders at a key time in the troubled U.S. military mission in Iraq.

"The intellectual and moral failures common to America's general officer corps in Vietnam and Iraq constitute a crisis in American generalship," said Yingling, who has served two tours in Iraq as well as in Bosnia and the 1991 Persian Gulf war.

"Given the lack of troop strength, not even the most brilliant general could have devised the ways necessary to stabilize post-Saddam Iraq," he wrote.

Yingling said he believes that no single civilian or military leader has caused what he regards as the current failure in Iraq. Instead, he argued that Congress must reform and better monitor the system for selecting and promoting generals.

It is interesting that Yingling is questioning both intellectual and moral implications of how we fought this war. His solution is of course half-baked given that this administration has proven time and time again that it is not interested in dissenting opinions. But the key point is that he is willing to say what he did in the first place. It was not without risk, and it is likely that any chance of his military advancement just went out the window.

Projects Crumbling in Iraq

The New York Times is writing Inspectors Find Rebuilt Projects Crumbling in Iraq.

In a troubling sign for the American-financed rebuilding program in Iraq, inspectors for a federal oversight agency have found that in a sampling of eight projects that the United States had declared successes, seven were no longer operating as designed because of plumbing and electrical failures, lack of proper maintenance, apparent looting and expensive equipment that lay idle.

The United States has previously admitted, sometimes under pressure from federal inspectors, that some of its reconstruction projects have been abandoned, delayed or poorly constructed. But this is the first time inspectors have found that projects officially declared a success — in some cases, as little as six months before the latest inspections — were no longer working properly.

At the airport, crucially important for the functioning of the country, inspectors found that while $11.8 million had been spent on new electrical generators, $8.6 million worth were no longer functioning.

At the maternity hospital, a rehabilitation project in the northern city of Erbil, an expensive incinerator for medical waste was padlocked — Iraqis at the hospital could not find the key when inspectors asked to see the equipment — and partly as a result, medical waste including syringes, used bandages and empty drug vials were clogging the sewage system and probably contaminating the water system.

The newly built water purification system was not functioning either.

Curiously, most of the problems seemed unrelated to sabotage stemming from Iraq’s parlous security situation, but instead were the product of poor initial construction, petty looting, a lack of any maintenance and simple neglect.

A case in point was the $5.2 million project undertaken by the United States Army Corps of Engineers to build the special forces barracks in Baghdad. The project was completed in September 2005, but by the time inspectors visited last month, there were numerous problems caused by faulty plumbing throughout the buildings, and four large electrical generators, each costing $50,000, were no longer operating.

No one should be shocked by any of this. The incompetence of this administration and its war effort simply has no boundaries. Once again this is a not a political statement per se, merely a statement of fact that any thinking person of either party should be willing to accept. It is failure to accept the obvious that is politics, as opposed to the statements as presented here.

The Ron Paul Solution

On March 20th Ron Paul wrote about Iraq War Funding.

If one is unhappy with our progress in Iraq after four years of war, voting to de-fund the war makes sense. If one is unhappy with the manner in which we went to war, without a constitutional declaration, voting no makes equally good sense.

Congress failed to meet its responsibilities four years ago, unconstitutionally transferring its explicit war power to the executive branch. Even though the administration started the subsequent pre-emptive war in Iraq, Congress bears the greatest responsibility for its lack of courage in fulfilling its duties. Since then Congress has obediently provided the funds and troops required to pursue this illegitimate war.

We won’t solve the problems in Iraq until we confront our failed policy of foreign interventionism. This latest appropriation does nothing to solve our dilemma. Micromanaging the war while continuing to fund it won’t help our troops.

Here’s a new approach: Congress should admit its mistake and repeal the authority wrongfully given to the executive branch in 2002. Repeal the congressional sanction and disavow presidential discretion in starting wars. Then start bringing our troops home.

If anyone charges that this approach does not support the troops, take a poll. Find out how reservists, guardsmen, and their families--many on their second or third tour in Iraq--feel about it.

The constant refrain that bringing our troops home would demonstrate a lack of support for them must be one of the most amazing distortions ever foisted on the American public. We’re so concerned about saving face, but whose face are we saving? A sensible policy would save American lives and follow the rules laid out for Congress in the Constitution—and avoid wars that have no purpose.

The claim that it’s unpatriotic to oppose spending more money in Iraq must be laid to rest as fraudulent.

We should pass a resolution that expresses congressional opposition to any more undeclared, unconstitutional, unnecessary, pre-emptive wars. We should be building a consensus for the future that makes it easier to end our current troubles in Iraq.

It’s amazing to me that this Congress is more intimidated by political propagandists and special interests than the American electorate, who sent a loud, clear message about the war in November. The large majority of Americans now want us out of Iraq.

Our leaders cannot grasp the tragic consequence of our policies toward Iraq for the past 25 years. It’s time we woke them up.

Since we stubbornly refuse to understand the nature of our foes, we are literally defeating ourselves.

In 2004, bin Laden stated that Al Qaeda’s goal was to bankrupt the United States. His second in command, Zawahari, is quoted as saying that the 9/11 attack would cause Americans to, “come and fight the war personally on our sand where they are within rifle range.”

Sadly, we are playing into their hands. This $124 billion appropriation is only part of the nearly $1 trillion in military spending for this year’s budget alone. We should be concerned about the coming bankruptcy and the crisis facing the U.S. dollar.

We have totally failed to adapt to modern warfare. We’re dealing with a small, nearly invisible enemy--an enemy without a country, a government, an army, a navy, an air force, or missiles. Yet our enemy is armed with suicidal determination, and motivated by our meddling in their regional affairs, to destroy us.

And as we bleed financially, our men and women in Iraq die needlessly while the injured swell Walter Reed hospital. Our government systematically undermines the Constitution and the liberties it’s supposed to protect-- for which it is claimed our soldiers are dying in faraway places.

Only with the complicity of Congress have we become a nation of pre-emptive war, secret military tribunals, torture, rejection of habeas corpus, warrantless searches, undue government secrecy, extraordinary renditions, and uncontrollable spying on the American people. The greatest danger we face is ourselves: what we are doing in the name of providing security for a people made fearful by distortions of facts. Fighting over there has nothing to do with preserving freedoms here at home. More likely the opposite is true.

Surely we can do better than this supplemental authorization. I plan to vote no.

Fiscal Insanity

That vote is of course history and one can debate endlessly about whether or not a political pragmatic solution or an idealistic solution like Ron Paul's is the correct approach. But I do not want to go there. Nor do I want to go on debating about war mongers like Hillary Clinton or worse yet John McCain.

Instead let's focus on where we are. From every aspect this war has been a disaster. It is fiscal insanity to waste a trillion dollars fighting an enemy that we do not know and cannot see, especially when a civil war is raging. It is reasonable to assume recent weakness in the dollar may be related to Bush's decision to send more troops and waste more money in that sinkhole.

Every great nation throughout history has met its demise my military over expansion. The methods today might be different, but the theory is the same. We cannot afford to be the world's policemen. Once again, this is not a political statement, it is a simple economic fact.

If we start pulling troops out of Iraq right now and cut back on insane levels of war funding, look for the US dollar to rally, and probably substantially. In addition, we would likely see a decline in gold and US equities. However, it is unlikely that this Congress has the political nerve to do what is right (something along the lines of what Ron Paul suggests), but one can always hope.

Of course, if the US or Israel is dumb enough to attack Iran, oil could head north of $100, perhaps substantially so. On the other hand if Iran is defused, oil prices could drop along with a weakening US economy.

Looking ahead to 2008, if Hillary or McCain is elected, figure on military status quo and kiss the US dollar goodbye (it it is not already burnt toast). The mother of all economic disasters occurs if we continue wasting money in Iraq (and other places) especially if coupled with protectionist legislation against China and Japan. In light of the above, it may be more important than ever to keep one eye on on the political front.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Inflation Targeting is Flawed

Bloomberg is reporting Bank of England's Inflation-Targeting Loses Luster.

The Bank of England, confronting a record-breaking real-estate boom, is finding there's more to monetary policy than just keeping consumer prices in check.

surging U.K. property values are throwing into question the inflation-targeting approach of Governor Mervyn King and his colleagues, which focuses on consumer prices as the lodestar of policy and gives lower priority to asset values, money supply and credit growth.

The bank's approach isn't broad enough to tackle asset bubbles that can burst and lead to recessions, says Tim Drayson, an economist at ABN Amro Holding NV in London who formerly worked at the U.K. Treasury.

"In a few years' time, people will find that inflation- targeting is flawed,'' he says."

Inflation Goal

The bank's goal is inflation of 2 percent, and it has kept average gains in consumer prices at 1.5 percent since 1997, compared with 4.2 percent in the previous eight years.

While that allowed King, 59, to slash interest rates to the lowest levels since the 1950s, he now faces what Claudio Borio, head of policy analysis at the Bank for International Settlements in Basel, Switzerland, calls a ``paradox of credibility'': The more a central bank succeeds in keeping prices stable, the more likely that signs of an overheating economy will show up first in asset bubbles.

As in the U.S., a combination of stable inflation and low interest rates triggered a real-estate boom in the U.K., where house prices have tripled in the past decade. In the last year alone, London values jumped 16 percent, reports HBOS Plc, the U.K.'s biggest mortgage lender.

King argues that asset values are inflated by many factors outside the bank's control, and it's better off focusing on a single gauge of consumer prices.

World Capital Markets

"What determines asset prices in the U.K. is very much a function of what's going on in the world capital markets," he told a parliamentary committee on April 24. "The impact of higher asset prices can't just be linked solely and exclusively to U.K. monetary policy and credit growth." Immigration and a property shortage caused by planning restrictions are also driving U.K. real-estate prices higher, policy makers say.

Still, King acknowledges that ignoring money supply and credit growth may lead policy makers into "tricky territory."

In 2005, he became the first Bank of England governor to be outvoted by his committee when it decided to ignore the fastest money-supply expansion in eight years and cut rates to shore up economic growth.

"In retrospect, it was a mistake," says Thomas Mayer, chief European economist at Deutsche Bank AG in London. The move reignited the housing market, sending the price of an average London home surging by a quarter. House-price inflation stood at 9.1 percent at the end of 2006, the London-based National Institute of Economic and Social Research said in a report today.

There is no question that inflation targeting is a mistake. For starters the Fed can not possibly know what neutral is if it were to bite them in the ass. After all, it is virtually impossible to define a representative basket of goods and services to measure prices.

For example: Gasoline is far more important to cab drivers than to someone living in a nursing home. Education is far more important to those with school aged children than those who are retired with no kids. Are home prices or rent more important and for who?

The measurement problem is made all the more difficult because new products and services come out all the time. Also compounding the problem (perhaps intentionally so) are hedonics and substitutions. No this does not all average out regardless of what anyone says (or if it does it is only by fleeting happenstance). Finally it should be noted that government has every reason to lie about prices to keep cost of living (COLAs) down for social security recipients.

But even if by some miracle the government was not distorting the data, measurements were accurate, etc etc, inflation targeting misses the boat because it excludes asset prices. Nonetheless, Bernanke is on the inflation targeting bandwagon.

Bernanke & Inflation Targeting

Back on October 17, 2003 Bernanke spoke about Inflation Targeting: Prospects and Problems.

Should the Federal Reserve announce a quantitative inflation objective? Those opposed to the idea have noted, correctly, that the Fed has built strong credibility as an inflation-fighter without taking that step, and that that credibility has allowed the Fed to be relatively flexible in responding to short-run disturbances to output and employment without destabilizing inflation expectations. So, the opponents argue, why reduce that flexibility unnecessarily by announcing an explicit target for inflation?

It would be foolish to deny that the Fed has been quite successful on the whole over the past two decades. Whether the U.S. central bank would have been even more successful, had it announced an explicit objective for inflation at some point, is impossible to say. We just don’t know. We can’t re-run history; and although empirical cross-country comparisons can be useful, they are far from being controlled experiments.

On the premise that effective communication is even more crucial near price stability, I will focus today on how an incremental move toward inflation targeting, in the form of the announcement of a long-run inflation objective, might help the Fed communicate better and perhaps improve policy decisions as well, without the costs feared by those concerned about potential loss of flexibility.

Given the bubbles in the stock market and housing, the implosion of subprime lending, consumer debt bubbles and an economy totally dependent on rising asset prices, Bernanke is showing more than a bit of misguided hubris when he states "It would be foolish to deny that the Fed has been quite successful on the whole over the past two decades". Then again perhaps we need to understand where Bernanke is coming from.

Consider Roger Garrison's article What Does Inflation Targeting Mean?

Although Ben Bernanke has pledged to ensure a continuity between the Greenspan policies and his own, he differs in several important respects, including his endorsement of "inflation targeting." Greenspan has always been against it.

But Bernanke's idea of "inflation targeting" is in need of some deconstruction.

First and foremost, it means that he actually wants some positive rate of inflation, a rate that is expected to persist and therefore gets factored into nominal interest rates. He wants nominal rates kept high enough to give the Fed some elbow room. That is, if the nominal fed-funds rate is, say, 5%, then the Fed has some scope for lowering that rate — in the event that it believes the economy is due for a monetary infusion.

Bernanke was most vocal about this view a year or so ago, when the fed-funds rate was 1% and Fed watchers began to worry about Greenspan "having no more arrows in his quiver."

But can Bernanke actually pursue a policy of inflation targeting in the literal sense? In other words, can he increase the money supply whenever, say, the CPI begins to indicate an inflation rate below the target rate and decrease the money supply whenever the CPI begins to indicate an inflation rate above the target rate? I don't think so.

The lag between changes in the money supply and corresponding changes in the CPI is somewhere between 18 and 30 months. This is the "long and variable lag" identified long ago by the monetarists. One of the lessons in Monetary Economics 101 is that a viable target must be one that yields timely feedback to the targeter.

Bernanke is an advocate of inflation targeting. We should understand this to mean that Bernanke is a deflation-scared inflationist.

For all his studies of the great depression, Bernanke still does not get it it. The fundamental cause of the great depression was the credit boom that preceded it. Inflation targeting that ignores asset prices is not targeting inflation at all. Inflation targeting must start with a proper definition of inflation: expansion of money and credit.

The current boom is a direct result of the greatest liquidity experiment the world has ever seen. Asset prices have been rising nearly everywhere as all central bankers have been in on it. It is now simply too late to do anything about it. All we can do sit sit back and wonder just how more insane things can get before they implode.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Capital Spending Suggests Hard Landing

Lost in the headline Capital spending bounces back in March is the fact that first quarter capital spending was down 15.3% annualized.

Demand for U.S.-made durable goods increased 3.4% in March, led by orders for aircraft and capital equipment, the Commerce Department reported Wednesday. "Capital spending is not in free fall," as some had feared, wrote Jan Hatzius, chief economist for Goldman Sachs, in a research note.

Economists were divided about whether the report was merely a one-month reprieve or a more fundamental turnaround in capital spending.

"With capital spending having fallen in the final three quarters of 2006 and quite possibly again in the first quarter of this year, the bear camp will rationally assert that the trend is down," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., in an email. "Armed with today's today, the bull camp will disagree and assert that a rebound is underway."

Treasuries sold off on the robust data. The market got it wrong, wrote Charles Dumas, an economist for Lombard Street Research. "The durable goods orders data confirm that business cap-ex [capital spending] is front-running a U.S. hard landing."

Demand for core capital equipment increased a robust 4.7% after a cumulative 8.5% decline in January and February. It was the biggest gain in this key gauge of business investment since September 2004. Still, the first quarter was the weakest for core capital equipment orders since the 2001 recession, falling at a 15.3% annual rate.

Durable goods have really been carried by civilian aircraft orders as Boeing booked orders for 119 planes in March compared with 57 in February. Outside of that, there has not been much to cheer about.

It is clear this economy is faltering.

• Core capital spending for the quarter is negative
• First Quarter Advance GDP came it at 1.3%
• Companies are downsizing managers.
• Existing home sales had biggest monthly slump in nearly two decades
• US auto sales were terrible.
• The Philly Fed manufacturing outlook was near zero

Barring some sort of miracle recovery, the next move by the Fed will be a cut. It will not save housing and in fact mortgage rates may not even decline due to increased default risk

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Ford Warns on Sales - GM Offers Rebates

Reuters is reporting Ford warns on U.S. industry sales, GM offers rebate.

U.S. auto industry sales have dropped far below expectations for April, a Ford Motor Co. executive said on Friday as rival General Motors Corp. rolled out an incentive program intended to boost crucial month-end sales.

"This month is terrible," Ford chief sales analyst George Pipas said in an interview. "We are not even close to where we expected to be in April."Pipas said the spillover from weaker housing to other areas of the economy and rising gas prices appear to be affecting consumers but added that many of these same factors were also present in March. "I have a hard time explaining why April is so weak," he said.

Ford and other automakers will report April U.S. sales on May 1. For the first three months of the year, U.S. industry-wide auto sales were down 1.2 percent. Earlier this week, General Motors Corp. Vice Chairman Bob Lutz said the crisis in the U.S. mortgage market has hurt U.S. auto sales this month.

Lutz said he did not know how GM's sales performed in April, but he expected the whole automotive sector would feel the impact of the stress on the mortgage market.

GM is offering lower-interest financing to customers with weaker credit ratings through this weekend in an effort to boost sales for April, sources familiar with the sales plan said on Friday. GM will offer reduced interest rates to customers whose credit is assessed at two of its lower rating levels on all brands except Saab, the sources said.

Detroit automakers had forecast a flat to slightly weaker vehicle market going into 2007 before the pressure intensified on subprime lenders, who have poor credit histories.

Pipas's comments followed cautionary remarks from auto dealers on the expected impact from the slowing housing market.

Weak housing starts have also weighed on sales of high-margin pickup trucks, often bought by construction workers. Ford is in the middle of a sweeping restructuring that involves closing 16 plants and cutting about 45,000 jobs.

Ford's U.S. sales were down 13 percent in the first quarter and GM's sales were down 5.5 percent, while Toyota sales rose 11 percent.

Pippas may have a hard time explaining weak sales but the better question is how did they hold up as long as they did? The answer can likely be found in the negative savings rate, and Mortgage Equity Withdrawal. The latter is drying up quickly as a source of consumer funds.

The striking point in the article is that smack in the face of a subprime lending fiasco, GM is desperate enough to boost sales by lowering finance charges to customers with weak credit ratings. This is as foolish as it is desperate.

In a pinch, big ticket items like cars are easier to cut back on than necessities like gasoline. But pressure is mounting in other places, even insurance.

Thousands of drivers scrimp on insurance

The Detroit News is reporting More drop collision and theft coverage as economy takes toll.

Hundreds of thousands of motorists in financially beleaguered Michigan have downgraded their auto insurance -- a money-saving gamble that could leave them without a ride if their vehicle is stolen or smacked by another car.

The latest available data shows that nearly 300,000 comprehensive policies were dropped from 2000 to 2004 -- a trend that has continued, some large insurers say. Comprehensive covers vehicle theft -- Detroit has nearly 100 reports a day -- and deer-vehicle accidents, a growing suburban problem.

Another 28,500 got rid of their collision policy, which covers damage from another vehicle, while many more are reducing coverage or raising deductibles to save money, agents say.

People face tough choices

In a state with the nation's second-highest unemployment rate -- 6.5 percent -- and sky-high auto insurance costs, some people are left choosing between keeping the electricity on and paying for full coverage, said St. Clair Lake, an Allstate agent in Detroit.

One reason for the soaring prices is the high rate of vehicle thefts in Detroit -- the city ranked 16th nationally in 2006 with 35,106, according to the National Insurance Crime Bureau. But the main factor is the cost of the state's "no-fault" insurance structure, officials said.

GM loses lead to Toyota

The Detroit News is reporting GM boss vows fight for sales

General Motors Chairman and CEO Rick Wagoner told senior executives the company hasn't given up the fight despite being outpaced by Toyota in global sales in the first quarter of the year.

"We still have the majority of the year in front of us, and we will fight hard for every sale -- all the while staying focused on our long-term goals as a global, growing company," he told high-level company officials in an e-mail Tuesday shortly after Toyota's sales numbers were released.

Wagoner said GM was surpassed by Toyota largely because of its move to reduce unprofitable sales to fleet customers and the fact that Toyota crushes GM in sales in Japan.

GM Vice Chairman Bob Lutz offered a curt response to Toyota's outpacing GM in the first three months of the year: "My reaction is 'So what?' "

He also noted that GM is "staying focused on further reducing our still huge health care cost disadvantage versus Toyota and other non-U.S. based manufacturers."

At the same time, an issue domestic automakers have been complaining loudly about is the value of the Japanese yen.

Automakers argue Japanese currency "manipulation" unfairly gives Toyota, Honda and Nissan up to a $4,000 per vehicle subsidy, by making American cars more expensive in Japan and Japanese imports less expensive here. Japan and Japanese automakers reject the charge.

Two-thirds of the U.S. $88 billion trade deficit with Japan is auto-related.

Japan subsidy edge touted

Last month, U.S. Sen. Debbie Stabenow, D-Lansing, introduced a bill dubbed the Japanese Currency Manipulation Act, which would force Japan's government "to take action to stop subsidizing millions of auto exports to the U.S. by bringing its currency into proper alignment with the U.S. dollar," said a statement from the Automotive Trade Policy Council, a group representing GM, Ford and DaimlerChrysler AG.

I am puzzled by the huge difference in reactions between Wagoner's vowing "to fight for every sale" while Lutz is saying "So What?" OK guys, which is it and why the interest rate rebates to subprime borrowers? Something tells me this is not just an April thing.

As for currency manipulation, if the US is allowed to debase it's currency the way we do, do we have a legitimate beef about what any other country is doing with their currency or why? It will be interesting to see if any of the misguided tariff efforts against Japan or China gather any steam.

Ford feels heat to refresh lineup

Analysts ask: Can Ford can roll out new models fast enough to keep its comeback going?

To survive in today's auto industry, you need a steady parade of fresh designs to keep consumers interested.

Ford Motor Co. learned that the hard way by allowing initially successful models like the Taurus and Ranger to languish too long without a significant refresh.

Today, it has the oldest lineup of any major automaker.

Ford is trying to change that. By 2010, it expects to have one of the freshest vehicle lineups. But after losing $12.7 billion last year and borrowing against nearly all of its assets to finance the turnaround plan, the question is whether Ford can survive long enough to see the product renaissance.

New models like the Fusion sedan and Edge crossover are not only selling well, but also bringing in new buyers to Ford.

But its aging vehicles like the Explorer SUV and the Focus sedan are losing sales and driving consumers to competing brands in alarming numbers.

According to J.D. Power, 58.5 percent of those who bought a Ford already owned a Ford, while only 42 percent of those who traded in a Ford bought another Ford.

That means most people buying Fords are already Ford customers, but nearly half of those trading in Fords are defecting to other brands.

The problem is shared by Ford's Detroit-based rivals, but the gap is greatest at Ford.

The reverse, however, is true for Toyota Motor Corp. Only 35.8 percent of Toyota buyers in the first quarter were return Toyota customers, yet 58.5 percent of those who traded in Toyotas bought another one.

Union Strife at GM

Reuters is reporting GM cuts work at 2 plants after talks fail.

Friday April 27, 2:48 am ET
General Motors suspended development work at two U.S. plants after talks between the union and management on cost cutting ended, the Wall Street Journal reported on its Web site on Friday.

United Auto Workers leaders ended talks at facilities in Fairfax, Kansas and Lordstown, Ohio after disagreements with the company, the Journal reported, citing unnamed sources.

The paper cited sources as saying GM told UAW that it was suspending work related to two new-vehicle programs.

UAW and GM could not immediately be reached for comment.

US Outlook is Poor

• The economy is dramatically slowing (GDP came in at 1.3%)
  
• Auto sales are falling
• Ford's lineup is aging
• GM is arguing with the union over cost cutting
• MEW is falling along with falling home prices
• GM is showing signs of desperation by appealing to subprime borrowers
  

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Managers are Passé

Circuit City started the ball rolling by Cutting More Than 3,500 Jobs.

A new plan for layoffs at Circuit City is openly targeting better-paid workers, risking a public backlash by implying that its wages are as subject to discounts as its flat-screen TVs.

The electronics retailer, facing larger competitors and falling sales, said Wednesday that it would lay off about 3,400 store workers -- immediately -- and replace them with lower-paid new hires as soon as possible.

The laid-off workers, about 8 percent of the company's total work force, would get a severance package and a chance to reapply for their former jobs, at lower pay, after a 10-week delay, the company said.

Citigroup stepped up to the plate big time with a massive Massive Restructuring Plan.

Citigroup Inc. said it will eliminate 17,000 jobs, or 5 percent of its workforce, as part of a broad restructuring plan designed to cut costs and bolster its long underperforming stock price.

Citigroup plans to move more than 9,500 jobs to lower-cost locations worldwide, with about two-thirds through attrition. It will also eliminate layers of management, often increasing the number of workers reporting to each manager.

Wal-Mart decided to follow suit by cutting manager jobs at Sam's Club.

The world's largest retailer, is cutting about 1,000 management positions at its Sam's Club stores, a spokeswoman for the company's warehouse chain said on Thursday.

Wal-Mart is consolidating about 2,800 salaried-manager positions at some 580 U.S. Sam's Club stores, spokeswoman Susan Koehler said.

The restructuring, which began in early March and is expected to be completed within the next couple of weeks, was done to improve customer service and gain more flexibility in managing the stores rather than to cut costs, Koehler said.

The company has created three higher-paying positions to replace about 1,800 of those jobs and is also offering affected employees other positions in the company, Koehler said.

So....

• Wal-Mart is "consolidating" 1,800 jobs down to 3
• Offering (presumably lower paying jobs) to those who were downsized. Most took it even though jobs are said to be plentiful.
• This was not done to cut costs but to improve service

Managers? Bah humbug. Who needs em? Get rid of them all and customer service will soar. They are after all, so Passé. What company will be next to realize that?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Knowledge Based Economy (Part 2)

I had no plans to do a part two when I wrote The Knowledge Based Economy nor did I know how well part one would be received. The number of comments to the above link was extremely high and many of them were excellent.

One of the ideas I proposed yesterday was that China and India were not standing still when it comes to education. Some responded with negative comments about what constitutes an engineer in China vs. the US. What I sense however, is enormous strides being made by China relative to the US at a time when US education costs are unjustifiably soaring in the US.

In a totally random event, there were two articles out today in the BBC supportive of my position (taking the liberty of using education in the UK as a Western proxy). The first was about college entrance exams in China vs. first year exams in the UK.

Maths enthusiasts are being challenged to answer a sample question from Chinese university entrance tests. The tests are set for prospective science undergraduates.

The UK's Royal Society of Chemistry is offering a £500 prize to one lucky but bright person who answers the question below correctly.

It has also published a test used in a "well known and respected" English university - the society is not naming it - to assess the strength of incoming science undergraduates' maths skills.





A glance at the two questions reveals how much more advanced is the maths teaching in China, where children learn the subject up to the age of 18, the society says.

It has sounded a warning about Britain's future economic prospects which it claims are threatened by competition from scientists in China. RSC chief executive Richard Pike says mathematics is seen as integral to the sciences in China and its economy.

Math is a Difficult Subject

The BBC is reporting Pupils 'are urged to drop math classes'.

The Royal Society of Chemistry said that as maths was a difficult subject, schools feared examination failures which would threaten their standings. Chief executive Richard Pike also said universities were increasingly having to run remedial classes in maths.

Dr Pike said: "Schools and students are reluctant to consider A-level mathematics to age 18, because the subject is regarded as difficult, and with league tables and university entrance governed by A-level points, easier subjects are taken."

In a paper entitled Why League Tables Have to Go, he said it was not unusual for students taking chemistry and biology to take another non-mathematical "quite unconnected" subject.

He went on: "Increasingly, universities are having to mount remedial sessions for incoming science undergraduates because their maths skills are so limited, with many having stopped formal lessons in mathematics two years earlier at the GCSE level."

This contrasted strongly with countries like China where maths was taught to all up the age of 18, he said.

William Shaw, professor of financial mathematics at King's College, London,[responded by calling it] a "cheap and uninformed" attack on UK teaching.

"We are changing the curriculum, creating a new entitlement to give more pupils the chance to study separate physics, chemistry and biology GCSEs and piloting 250 science clubs for 11 to 14-year-olds."

In the United States, many good students might not learn calculus until they got to college.

"So I could set a test for university entrants in China (or the US) which many British sixth form maths students could do, based on some calculus, which could make a similarly unbalanced media story in the Chinese papers," he said.

Choose a Door

1. This is just a "curriculum change".
2. It's the UK that's lagging, not the US.
3. China is making huge inroads vs. the UK and US in math, science, and medicine.

I select door number 3.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/