“Took a shot to the chin. Looks like it‘s hard to win. In this do or die situation.” -from the song “Hang Tough” by Tesla.
Here we go: the bad economic news is starting to pile up now, much the way a tidal wave slowly gains momentum and force as it heads towards land.
Ben Bernanke, chairman of the Federal Reserve, presented his market outlook before members of Congress this morning and pretty much everything he said points to inflation and a possible economic recession for the U.S. in the months ahead. While everyone in trucking knows it‘s bad out there, it makes it all the more grimmer when the top money man in Washington D.C. backs that feeling up with stark facts.
Bernanke said that while the U.S. economy performed reasonably well over the last two quarters, with real gross domestic product (GDP) growing at an average pace of nearly 4%, the ongoing trouble in the housing market coupled to skyrocketing oil prices doesn‘t bode well for the near term.
“In particular, prices of crude oil and other commodities had increased sharply in recent weeks,” he said [they topped $97 a barrel today]. “And the foreign exchange value of the dollar had weakened. These factors [are] likely to increase overall inflation in the short run and, should inflation expectations become unmoored, have the potential to boost inflation in the longer run as well.”
That‘s putting it mildly: in downtown Washington D.C. today, diesel fuel prices reached $3.55 per gallon - and we‘re only at the beginning of the fuel price run-up here. Winter hasn‘t really set in yet, so when it does, the corresponding jump in home heating oil demand is going to make things at lot more expensive at the pump.
The meltdown in the housing market continues aggravating things as well - especially in terms of drying up credit, which is the lifeblood of any business. “The economic outlook has been importantly affected by recent developments in financial markets, which have come under significant pressure in the past few months,” Bernanke said.
“The financial turmoil was triggered by investor concerns about the credit quality of mortgages, especially sub-prime mortgages with adjustable interest rates,” he noted. “The continuing increase in the rate of serious delinquencies for such mortgages reflects in part a decline in underwriting standards in recent years as well as softening house prices. Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage sub-prime loans experience their first interest rate resets.”
In the area of business credit, investors are shying away from financing leveraged buyouts and from purchasing speculative-grade corporate bonds. And some larger banks, concerned about potentially large and difficult-to-predict draws on their liquidity and balance sheet capacity, are less willing to provide funding to their customers or to each other, he said.
“To be sure, the recent developments may well lead to a healthier financial system in the medium to long term,” Bernanke added on a positive note. “Investors have also become more cautious and are demanding greater compensation for bearing risk. In the short term, however, these events do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain.”
In short, it‘s looking like the rough times are going to stretch out even longer than previously thought, though I for one am hoping things settle down soon. It‘s that or start busing my kids to school by bike.