Glum economic forecast as oil prices, inflation climb
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON — Stocks fell sharply Wednesday for the second consecutive day after oil prices surged to fresh new highs and the Federal Reserve released a revised economic forecast that paints a glum outlook for the rest of this year.
Minutes of the April 29-30 meeting of the rate-setting Federal Open Market Committee (FOMC) were released Wednesday, indicating that inflation is gathering steam and so additional interest rate cuts to spark the economy won't be coming.
The Fed also released revised economic projections that envision a sharp rise in unemployment and put this year's projected U.S. economic growth between a dismal 0.3 percent and 1.2 percent. That's down sharply from January growth estimates between 1.3 percent and 2 percent.
Wall Street didn't like the fact that the high end of the Fed's new forecast is lower than the low end of January's economic forecast. Following a 199-point drop Tuesday, the Dow Jones Industrial Average fell another 227.49 points on Wednesday to close at 12,601.19. The S&P 500 was off 22.69 points to 1390.71, and the Nasdaq fell 43.99 points to 2448.27.
Stocks also fell because crude oil prices smashed through $130 a barrel to settle at $133.17, up $4.19, on news that U.S. oil stockpiles fell by 5.3 million barrels last week. Oil prices rose beyond $134 a barrel in after-hours trading.
It adds up to an increasingly grim outlook for the next 18 months.
"Incoming data on spending and employment already indicated a softening economy," the Fed said in its revised forecast from the Fed governors and the presidents of the 12 Federal Reserve Banks. "Real incomes were being held down by higher oil prices; falling house prices had reduced household wealth; and households and businesses were facing tighter credit conditions."
In plain English, the Fed said that Americans have less to spend because they're forking over much more at the gas pump; they're poorer because their homes are worth less; and banks are less willing to lend to consumers or businesses, further slowing economic activity.
"From the consumer's perspective, nothing is going right," said Mark Zandi, the chief economist for Moody's Economy.com in West Chester, Pa.. "We're losing jobs, the stock market is at best wobbly, housing prices are evaporating and gas prices headed to $4 a gallon. All of it adds up to households that are less wealthy and have less purchasing power."
These trends are unlikely to reverse anytime soon.
Investment banking giant Goldman Sachs & Co. this week revised its oil price outlook and forecast average crude oil prices of $141 a barrel for the second half of 2008. That would mean gasoline prices at $4 a gallon or higher.
In a research note late Wednesday, Bank of America economist Gary Bigg noted that the Fed feared a scenario "in which weaker growth leads to increased financial stresses, which then leads to weaker growth" and a bad trend feeds on itself.
That's already happening. Citing higher fuel costs and an economic downturn, AMR Corp., the parent company of American Airlines, said Wednesday it would pull 75 aircraft out of service, slap a $15 fee on the first bag checked by passengers and reduce its total flight capacity by about 12 percent.
American will raise other fees and lay off an unspecified number of employees, making it costlier to fly and adding more people to the ranks of the unemployed.
Fed leaders in January predicted an unemployment rate between 5.2 percent and 5.3 percent. They now believe that in this year's fourth quarter, the unemployment rate will be between 5.5 percent and 5.7 percent.
Headline inflation, the higher price consumers pay at the register, is now projected to be between 3.1 percent and 3.4 percent. In January, Fed leaders projected a range of 2.1 percent to 2.4 percent.
ON THE WEB
Minutes of the Fed's April meeting
Revised Fed forecast
McClatchy Newspapers 2008
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