Economic concerns deepen
President Bush sought to calm the contagion of fear in financial markets Tuesday, but his upbeat tone was out of sync with a sobering new assessment from Federal Reserve Chairman Ben S. Bernanke, a jump in the prices manufacturers pay for raw materials and other unsettling economic portents.
The stock market tumbled again. Retail sales were disappointing. And some key members of Congress indicated they would try to slow down approval of a plan to bolster mortgage giants Fannie Mae and Freddie Mac. Even a substantial drop in oil prices was seen as a sign of declining confidence in the U.S. economy.
Bush, in his first comments on the economy since investors accelerated their sell-off of Fannie Mae and Freddie Mac shares last week, acknowledged “we’re going through a tough time.” But he insisted Americans “can have confidence in the long-term foundation of our economy.”
“We will come through this challenge stronger than ever before,” Bush declared at a White House news conference. “Our economy has continued growing, consumers are spending, businesses are investing, exports continue increasing, and American productivity remains strong.”
But the optimistic tenor of Bush’s remarks was strikingly at odds with the picture Bernanke painted in his semiannual appearance before the Senate Banking Committee. The economy is caught in cross-currents of weak growth and strengthening inflation, he said, and the combination will present a stern challenge for policymakers in the months ahead.
“The effects of the housing contraction and of the financial head winds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation,” Bernanke said. “Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated.”
Treasury Secretary Henry M. Paulson Jr. and SEC Chairman Christopher Cox also spoke out during the day, seeking to quell the economic anxiety that has gripped Wall Street and the country. But reassuring language out of Washington appeared to have little effect.
The Dow Jones industrial average sank more than 225 points in the morning as traders were spooked by Bernanke’s dour pronouncements. The market recovered in mid-day when oil prices dropped, but skidded again in the afternoon in a show of investors’ deep skepticism.
The Dow finished down 92.65 points, or 0.8%, to 10,962.54.
“It was a day of ugliness,” said Georges Yared, chief investment strategist at Yared Investment research in Minneapolis. “What else can you say?”
In dollar terms, crude oil recorded its biggest drop since 1991 amid fear that the weakening economy would cause demand to fall precipitously. Prices slumped almost 5%, sinking $6.44 to $138.74 a barrel. But analysts drew scant comfort from the decline, convinced that it was stimulated by declining confidence in the U.S. economic outlook.
That assessment was reinforced when the dollar briefly fell to a new low against the euro.
Elsewhere, the latest report on producer prices -- what manufacturers and other producers pay for the materials they buy -- showed inflationary pressures continuing to build.
Wholesale prices jumped a larger-than-expected 1.8% in June, their sixth consecutive rise. The increase was propelled largely by higher fuel prices. Wholesale inflation has swelled 9.2% over the last year, the largest 12-month increase since 1981.
Retail sales inched up a less-than-expected 0.1% in June as car sales fell. The lackluster sales gain stoked fear that the consumer spending surge that was created by the government’s economic-stimulus program is petering out now that most checks have been distributed to taxpayers.
Shares of battered mortgage-finance companies resumed their slides, with Fannie Mae dropping 27% and Freddie Mac slumping 26%.
The glum mood pervading Wall Street evoked gallows humor among some. “Get away from that window,” James Paulsen, chief investment strategist of Wells Capital Management, wrote in a note to clients. “Don’t jump just yet!!!”
The Securities and Exchange Commission also took a surprise step to prop up the stocks of Fannie Mae and Freddie Mac as well as those of 17 financial-services companies.
The SEC announced it was cracking down on the use of a trading strategy in which investors sought to profit from drops in the stock prices. The move initially applies only to those 19 stocks, but the SEC said it was contemplating an expansion to the entire market.
The move is a part of a stepped-up effort to enforce longstanding rules governing so-called short selling. It follows an SEC announcement Sunday that it was investigating whether certain traders were spreading false rumors to manipulate stock prices.
A debate has raged about whether unscrupulous traders are manipulating the stock and commodity markets -- specifically, to drive down the prices of financial stocks and push up the prices of commodities.
However, some experts suggested that any anti-speculation moves by lawmakers could backfire by allowing them to be portrayed as so desperate to reverse the sliding fortunes of major banks and brokerages that they are encroaching on the private markets.
“The markets are scared and there is an air of panic underneath it all,” said Diane Swonk, chief economist at Mesirow Financial, a Chicago brokerage firm. “It looks like they’ve reined in a portion of that . . . but they still don’t have a deal.”
The government has taken a series of unprecedented steps throughout the housing crisis, including the Federal Reserve-engineered sale of Bear Stearns Cos. in March and the plan announced Sunday for the Treasury Department to potentially buy stock in Fannie Mae and Freddie Mac.
“Here we are -- the freest market in the world -- and we’re talking about curbing speculation and [undertaking] government intervention,” said Kevin Kruszenski, director of trading at KeyBanc Capital Markets in Cleveland. “I’m not sure that’s the answer.”
Meanwhile, key members of Congress signaled that they were unlikely to put a hasty rubber stamp on the Treasury Department’s proposal to rescue Fannie and Freddie by temporarily extending an unlimited line of credit and permitting the government to purchase stock in the quasi-public companies.
“I think we all certainly appreciate the spirit in which the Fed, the SEC and Treasury Department have acted,” said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. “But we do them and the American people a disservice if we do not examine very carefully the proposals that are being put forward.”
“The best we can say [is] this is Paulson going out there and doing what he thinks is right in the short term,” said Rep. Scott Garrett (R-N.J.). “But we have to do what we think is right in the long term.”
Reynolds reported from Washington and Hamilton from New York. Times staff writer Richard Simon in Washington contributed to this report.
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Federal Reserve Chairman Ben S. Bernanke’s view on the economy has shifted over the last year:
July 19, 2007: “Rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities, problems that will likely get worse before they get better.”
Nov. 8, 2007: “So far, at least, the spillovers of housing to the broader economy [have] been limited. Our forecast is for moderate but positive growth going forward.”
Feb. 27, 2008: “The economic situation has become distinctly less favorable since the time of our July report.”
April 2, 2008: “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in [place] that should support a return to growth in the second half of this year and next year.”
July 10, 2008: “The financial turmoil that began last summer has impeded the ability of the financial system to perform its normal functions and adversely affected the broader economy.”
Source: Times research