The Growing Army of the Unemployed
More than half a million jobs a month. That's how many have vanished since September in the U.S., and the toll is likely to stay that high for a few months more. On Feb. 4 payroll giant Automatic Data Processing (ADP) said the private sector axed 522,000 positions in January. Washington was scheduled to release its payroll report, which includes government jobs, two days later. On Jan. 30 the Commerce Dept. reported that GDP fell in the fourth quarter at an annual rate of 3.8%, the worst since 1982. Believe it or not, that was better than economists had predicted, but only because inventories ballooned with unsold goods as consumers cut spending by 1%. The savings rate jumped to 3.6% in December and could reach double digits by yearend. GDP seems likely to drop this quarter at a dizzying rate of 5% to 6%.
Fast Financial Fixes?
Even as Washington focused on the stimulus package and the unraveling of key appointments, the White House and Congress were looking to the next frontier: remaking last fall's financial-system bailout and revamping regs to prevent a repeat. On Feb. 4, President Barack Obama unveiled rules that limit executives at financial firms receiving future government emergency aid—the kind that went to Citigroup (C), AIG (AIG), and Bank of America (BAC)—to total compensation of no more than $500,000 plus restricted stock. The Treasury will propose that banks receiving regular TARP funds be subject to the same cap, but if they allow shareholders a vote on pay, they'll be able to evade it. Democrats promise quick action on a new approach to stabilizing banks as soon as mid-February.
"I screwed up," said President Obama hours after what he described as a "self-induced injury"—the nominations of health reform point man Tom Daschle and government efficiency czar Nancy Killefer, both of whom withdrew on Feb. 3. Like Treasury Secretary Tim Geithner, the duo had neglected to pay taxes as private citizens. In the case of Daschle, lucrative post-senatorial earnings as a "strategic adviser" to corporations (and use of a free Cadillac and driver) doubly undercut the new President, who espouses citizen responsibility and urges a stop to Washington's "revolving door." On Feb. 3, Obama tapped a longtime buddy to business, Senator Judd Gregg (R-N.H.), to run the Commerce Dept., an agency the fiscal conservative once voted to abolish.
See "Judd Gregg: A Curious Choice for Commerce"
Citi Makes Its Case
So what are the big banks doing with all that taxpayer cash? As required, Citigroup (C) on Feb. 3 became the first to issue a report detailing the deployment of the $45 billion that Treasury has invested as part of its Troubled Asset Relief Program, or TARP. There's no mistaking the intent of the report, which covers the fourth quarter of 2008. Its title: What Citi is Doing to Expand the Flow of Credit, Support Homeowners, and Help the U.S. Economy. The bank says it has spent $36.5 billion in TARP-backed funds on such worthy efforts as loans to home buyers, students, and businesses, new lines of credit, and buying mortgage-backed paper. One investment it may trim: the new baseball stadium for the New York Mets. The Wall Street Journal said on Feb. 4 that the bank is rethinking the terms of its $400 million deal for naming rights. Citi commented: "No TARP capital will be used for Citi Field.
'Bad Banks' in Europe?
Many financial houses in Europe remain in shaky shape, too, but the European Central Bank, after being lambasted for its laggard response to the global downturn, finally may be getting its act together. On Feb. 2, The Wall Street Journal said the ECB is working on rules that would allow governments to guarantee toxic assets on banks' books. That follows similar plans unveiled by Britain's central bank and represents a move toward "bad banks"—state-run institutions that would manage the Continent's bad paper.
Earnings: the Good...
Gloom has pervaded the earnings season, but sunlight has shone through here and there. Standouts include some big pharma outfits, such as Merck (MRK), which on Feb. 3 said it made $1.6 billion in the fourth quarter, and Schering-Plough, which showed $442 million in black ink. Both results surprised the Street and stemmed from strenuous cost-cutting: The two have chopped 10% and 13% of their workforces, respectively. Another winner: security systems maker Tyco International (TYC), which on Feb. 3 wowed investors by ringing up earnings of 61 cents a share, far above the consensus estimate of 47 cents.
...And the Bad
Leading the lineup of companies reporting lousy results was Motorola (MOT), whose long-awaited turnaround—well, you're just going to have to wait some more. The company lost $3.6 billion, mostly on one-time charges, as handset sales continued to fizzle, falling 51%. Dow Chemical (DOW) lost $1.55 billion, citing weak demand that it expects to last for "several quarters and possibly beyond." And Time Warner bled $16 billion after taking $24 billion in writedowns.
See "Where Motorola Blew It"
After a disastrous holiday season, everyone knew it would be a painful year for storekeepers. The latest example: Macy's (M), which on Feb. 2 joined Best Buy (BBY), Home Depot (HD), Neiman Marcus, Saks (SKS), and Target (TGT) on the list of retailers making sweeping job cuts. Macy's said it would zap 7,000 jobs, or 4% of its workforce, and terminate merit salary increases. On the same day, jewelry and home furnishing purveyor Fortunoff shut its flagship Manhattan store, and Bloomberg reported that the jeweler is in talks with liquidators.
Cutting Back in Africa
Is China losing interest in Africa? During the commodity boom, Chinese companies galloped all over the Sub-Saharan region, with investments topping $6 billion by early 2008. But as prices for oil, copper, cobalt, and other minerals plummet, some are beating a retreat. More than 100 small-time Chinese operators have quit mines in Zambia, and at least 60 have exited Congo. And it's doubtful whether Beijing will make good on its 2007 pledge to invest $5 billion in Congo to modernize infrastructure and mining. (China Brief, Jamestown Foundation)
I'd Like 400 Planes, Please
While other airlines struggle to fill planes, Ryanair (RYAAY) CEO Michael O'Leary is taking advantage of the downturn to buy them. Europe's largest discount airline, which operates a fleet of 181 Boeing 737-800 aircraft, is talking to Boeing (BA) and its rival Airbus about ordering as many as 400 new planes in the next 18 months to two years. The outspoken Irish CEO, who once promised to help Boeing "kick Airbus' ass" in Europe, says the carrier, with 58 million passengers, is now big enough to break with the low-cost model of running one type of fleet. Ryanair lost $130 million in the December quarter, its first loss since going public in 1997.
See "Ryanair Tastes Red Ink"
Out of Work in China
More than 20 million migrant workers went home for the lunar new year and stayed there—because they had lost their jobs. So said Chen Xiwen, head of the Communist Party's office on rural policy, on Feb. 2. Millions more newly unemployed are swelling east coast cities, where thousands of factories have been shuttered. With exports plunging and the domestic economy losing steam this year, jobless ranks will swell to 25 million. Beijing fears possible unrest as the 20th anniversary of the June 4 Tiananmen Square massacre approaches.
Desperate in Detroit
The weather in January was cruel—but not half as cruel as the month was for carmakers. U.S. auto sales fell 40%, the poorest start for a year since 1963. Detroit's Big Three fared the worst, especially General Motors (GM) and Chrysler, each with sales declines in excess of 50%. Ford (F) sales dropped 40%, and Toyota (TM) and Honda (HMC) each posted declines of about 30%. Meanwhile, GM lobbyists hit Capitol Hill again, trying to get a potential tax liability waived. GM must get bondholders to accept equity for their debt, but the freed-up cash would lead to a tax liability as fat as $7 billion—enough to put the company under.