GE earnings fall as the recession and credit crunch broaden their impact

A 5.8% decline in General Electric's first quarter profit is a further indication that the recession and credit crunch are increasingly hitting the general business economy. If GE earnings, with its substantial international focus, can be hurt that much,there is bound to be more bad corporate news ahead. That realization contributed to the outsized Friday decline in the equity market. Though equity prices are still above their lows, there is likely to be at least a retest of those lows and quite likely new lows established. That seems to readily follow from the prospect that the recession not only has significantly further to fall, but is likely to be extended through year end and perhaps into next year. Expect more financial industry losses and write-downs. And more dissapointing earnings reports beyond the financial community and housing. And there are more problems ahead in those sectors.

Housing prices are projected to continue dropping until at least spring 2009. The inventory of unsold homes is already equal to ten or eleven months of the home sales pace, versus a more normal four months of inventory. And there is no indication that the inventory of unsold homes has as yet topped out. Home foreclosures are virtually certain to continue soaring in response to sharply higher mortgage interest rates on the substanial proportion mortgage loans that will be reset, rising unemployment, falling home prices and high energy costs among other factors constraining home- owner discretionary income. The painfully-learned home mortgage lessons of the depression of the 1930s were too readily disregarded. Short-term interest only mortgages were an invitation to home-owner financial disaster then. To correct for those mistakes, self-amortized mortgages with substantial homeowner equity were introduced. But, in recent years mortgages with interest only, negative amortization, loans of up to 125% of appraised value and no document, no income sub-prime loans created a potential for wide-spread financial disaster that has not been fully realized.

Consumer confidence has plunged to a 26-year low. That historic drop portends substantial consumer spending caution. It also suggests the employment picture is bleaker than officially reported. For example, seasonally adjusted nonfarm payrolls were reported to have fallen 80,000 in March and 232,000 in the first quarter. But these employment loss numbers are partially estimated. In March alone, without the estimated part of employment growth, the net loss of payroll jobs could have been as high as 222,000 rather than the 80,000 actually reported. The official employment decline, weak as it currently is, nevertheless notoriously understates reality when the economy is sinking into recession. The suspicion that this typical pattern of employment loss understatement is being repeated appears supported by the unusually steep drop in consumer confidence. Together these elements suggest that consumption,accounting for some seven-tenths of GDP, will soon be contributing to a deepening recession. Weak retail sales at many non-discount retailers suggests that process is already beginning.

Given these wide-ranging problems, the Fed is projected to cut the funds rate to at least 2.0% or more likely 1.75% in this month's meeting. But the Fed easing will in all probability not stop there. A return to the 1.0% Federal funds rate low seems a likely prospect.

Philip Braverman, President
Braverman Economic Consulting
One Hewitt Square #249
East Northport New York 11731