Monday, March 9, 2009
Jobs: Another 651,000 Lost in February
Reports Show a Ramped-Up Recession
By BW Staff
O.K., we get it: The economy is bad. The Federal Reserve, in its Beige Book report released Mar. 4, said that "economic conditions deteriorated further" in the period surveyed from January through late February. Other reports released the same day continued the same recessionary drumbeat, with ADP's February survey of U.S. private employment showing a loss of 697,000 jobs on the month, while the Institute for Supply Management's nonmanufacturing index for February showed that the service sector remained firmly in contraction mode.
BusinessWeek compiled selected insights from Wall Street analysts and economists on the downbeat data—and other topics—on Mar. 4:
Action Economics The Fed's Beige Book reiterated that "economic conditions deteriorated further" since the reporting period from January through late February. That's consistent with the summary statements since October. Ten of the twelve Districts reported weaker conditions or declines in activity, with the exception of Philly and Chicago, that said their economies "remained weak." The deterioration was broad-based. And contacts don't look for a significant pickup before later this year or in early 2010. Consumer spending remained sluggish, though many Districts said conditions improved in the first two months of the year compared to the dismal holiday season. There were "pronounced" declines in manufacturing. Conditions also weakened "substantially" for extractors of natural resources due to the decline in global demand. Real estate markets remains largely stagnant with only minimal signs of stabilization in some areas, while demand for commercial real estate weakened "significantly."
There were further declines in business loan demand and a slight deterioration in credit quality for businesses and households. Upward price pressures were "very limited," while upward wage pressures eased in all Districts as a rising incidence of hiring freezes and ongoing job cuts increased the slack in the labor market.
Beth Ann Bovino, Standard & Poor's The U.S. ADP report [showed that] private payrolls plunged 697,000 in February, after a downwardly revised 614,000 drop in January (from -522,000). Jobs in the goods-producing sector fell 338,000, and are down for a 26th straight month. Manufacturing lost 219,000 jobs, a 36th consecutive monthly decline. Service producing jobs fell 359,000 from a 279,000 loss. Construction jobs fell 114,000, and have posted 25 straight monthly declines.
The data are worse than expected, to suggest downside risk to the Friday's payroll. We now expect 625,000 jobs to be lost in February.
Ted Wieseman, Morgan Stanley The composite nonmanufacturing ISM index fell to 41.6 in February from 42.9 in January, remaining deeply in recessionary territory, while continuing to hold somewhat above the all-time low of 37.4 hit in November. The business activity (40.2 vs. 44.2), orders (40.7 vs. 41.6), and supplier deliveries (48.0 vs. 51.5) gauges turned lower, while the employment index (37.3 vs. 34.4) rose but remained at a level consistent with continued severe job losses. Weakness by industry was very broadly based. Only one sector (entertainment) reported growth and 14 contracted. Problems obtaining credit were mentioned in the report as a significant issue in some sectors. The prices paid gauge rose to 48.1 from 42.5, with the recent rebound in gasoline prices noted.
Tony Crescenzi, Miller Tabak The Treasury yield curve continues to steepen, which has both good and bad connotations. The most important positive is that a steep yield curve typically precedes economic recoveries. Today the spread between 3-month T-bills and 10-year T-notes— the key empirical gauge used in forecasting models—is 273 basis points, a level that historically has indicated the chances of recession 12 months hence are very small. For example, in a study by Estrella and Mishkin, a yield spread of more than 121 basis points was associated with just a 5% chance of recession, which makes the current level comforting. Some of the recent steepening reflects the increase in Treasury supply, with the long end of the yield curve bearing the burden. This is the negative side. If the U.S. dollar were to fall, any steepening would take on an even larger negative connotation, but the dollar's decline would have to be significant to have meaningful impact.
The negative implication of a significant dollar drop and sharply steeper curve is the message it sends regarding the global appetite for U.S. assets. Any increase in the cost of capital in the U.S. would complicate efforts to battle the financial and economic crisis.
Jobs: Another 651,000 Lost in February
William Knapp, MainStay Investments
February payroll and unemployment data came in pretty much as anticipated. The Labor Dept. reported Friday in its Payroll Survey that the U.S. economy shed 651,000 jobs for the month. In the separate Household Survey, the unemployment rate rose half a percent, to 8.1%.
Revisions to January and December cropped an additional 161,000 jobs. Cumulative jobs lost since the current recession began in December 2007 stand at about 4.4 million, with much of that loss (2.6 million jobs) occurring in the past four months.
At 8.1%, the unemployment rate now exceeds the peak from the 1991 recession, 7.8% in June of 1992, and is at a 25-year high. During the recession of the early 1980s, the unemployment rate was greater than 8% for 26 months, from November 1981 through January 1984. From September 1982 through June of 1983 (10 months), the rate was greater than 10%, peaking at 10.8% in November and December of 1982.
Unemployment claims remain high, but did unexpectedly decline last week. For the week ending February 28, the seasonally adjusted initial claims for unemployment was 639,000, a decrease of 31,000 from the previous week's revised figure of 670,000, the Labor Dept. reported Thursday. The four-week moving average was 641,750, up 2,000 from last week.
Texas Firm Accused of $8 Billion Fraud
On Tuesday, his reign was thrown into turmoil as a caravan of cars and trucks carrying federal authorities pulled up to the headquarters of his company, the Stanford Group, to shut down what the regulators described as a “massive ongoing fraud” stretching from the Caribbean to Texas, and around the world.
Unknown is the status of investments in as much as $8 billion in high-yielding certificates of deposit held in the firm’s bank in Antigua, which the Securities and Exchange Commission, in a civil suit, said Mr. Stanford and two colleagues fraudulently peddled to scores of investors.
Also unknown Tuesday were the whereabouts of Mr. Stanford — or Sir Allen, as he became known after the Antiguan prime minister knighted him — whose financial activities on the tiny island had raised eyebrows among American authorities as far back as a decade ago.
Like Bernard L. Madoff, who is accused of operating a $50 billion Ponzi scheme, Mr. Stanford offered investment opportunities that sounded almost too good to be true: promises of lucrative returns on relatively safe certificates of deposit that were often more than twice the going rate offered by mainstream banks.
In fact, a substantial portion of the bank’s portfolio was in very illiquid real estate and private equity investments. The portfolio was monitored by only two individuals — Mr. Stanford and James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate. The Antiguan auditor does not audit the bank’s portfolio or verify its assets.While regulators are not accusing Mr. Stanford of operating a Ponzi scheme, they claim Stanford Group lulled investors into believing the C.D. purchases were safe by advertising investments in “liquid” securities that could be bought and sold easily.
Stanford Group said it could pay higher rates on the C.D.’s because of the consistently high returns it made on investor assets. And it claimed to be safe, thanks to monitoring by a team of more than 20 analysts and yearly audits of the investments by regulators in Antigua.
None of that was true, according to the S.E.C.’s complaint.
In its filing, the S.E.C. said the bank’s consistent returns — it reported identical returns of 15.71 percent in 1995 and 1996 — were “improbable, if not impossible.”
And while the size of the alleged fraud spun by Mr. Stanford and his colleagues pales in comparison to Mr. Madoff’s scheme, the revelation that Stanford Group’s returns may, in fact, have been ephemeral is likely to further erode confidence among investors who place money with investment advisers.
“I am extremely concerned. On a scale from one to 10 — infinity,” said Brett Zagone, a Houston technology saleswoman who walked up to Stanford Group’s Houston offices Tuesday to find out what had happened to the money she had invested there.
At the St. John’s branch of Stanford’s Bank of Antigua, a long line of customers waited to withdraw money as the news spread, Reuters reported.
Regulators, too, are likely to face tough questions as more is learned about Mr. Stanford’s activities. Already under fire for missing several red flags over the years in the Madoff case, regulators could face similar questions as Mr. Stanford’s offshore banking activities caught the attention of law enforcement agencies dating as far back as 1998. In its complaint, filed in Federal District Court in Dallas, the S.E.C. accused Mr. Stanford, Mr. Davis and Laura Pendergest-Holt, the chief investment officer of both organizations, with misrepresenting the safety and liquidity of the C.D.’s. The Antiguan bank and its registered broker-dealer in Houston, which sold the C.D.’s, were also named. The bank claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit operates about 30 domestic offices.
Most witnesses, including Mr. Stanford, Mr. Davis and the Antigua-based bank’s president, failed to appear to testify and did not provide any documents shedding light on the assets. Stanford Group declined to comment.
Over the years, Mr. Stanford cultivated the profile of a successful American businessman, partly by burnishing his connections with athletes. For example, the pro golfer Vijay Singh signed a deal to make the firm’s logo, the Golden Eagle, the dominant brand on his apparel and golf bag. A spokesman for Mr. Singh’s agent declined to comment.
On the tiny island of Antigua, Mr. Stanford’s presence was both large and controversial. He was viewed by many as cozying up with key politicians to win their favor. His activities there drew the eye of American law enforcement agencies in the late 1990s, when regulators were closely scrutinizing the growth of the offshore banking sector, after a couple of money-laundering scandals had hit the industry.
Around that time, Mr. Stanford had also become an adviser to Lester Bird, then Antigua’s prime minister, who formed a banking advisory board to clean up the country’s image. Mr. Stanford’s bank was the largest bank regulated by the board. The project was paid for by the Antiguan government from money lent or granted by Mr. Stanford.
“They wanted to convince us that Antigua was clean and to highlight reform efforts,” recalled Jonathan Winer, who was at the time a deputy assistant secretary of state.
In 2001, Antigua was removed from the financial watch list.
Mr. Stanford and his firm have emerged as recent contributors to various American lawmakers, focusing particularly on legislators considering bills that could change offshore banking rules. In 2008, he made $3,300 in political contributions to Representative Charles B. Rangel, a New York Democrat who has presided over legislation easing tax policies for the Virgin Islands as head of the House Ways and Means Committee.
The current S.E.C. charges stem from an inquiry opened in October 2006 after a routine exam of Stanford Group, according to Stephen J. Korotash, an associate regional director of enforcement with the agency’s Fort Worth office.
He said the S.E.C. “stood down” on its investigation at the time at the request of another federal agency, which he declined to name, but resumed the inquiry in December 2008.
Clifford Krauss reported from Houston, and Julie Creswell and Phillip L. Zweig from New York.
