May 21, 2009

Economic Outlook: Fed dims its forecast

The U.S. Federal Reserve's downgraded forecast dampened investment activity here, there and everywhere, as markets turned sour around the globe Thursday.

In midday trading, European markets were slogging through a dour day with most markets down 1.5 percent to 2 percent. Closer to the close of trading, Asian markets also fell.

The Fed's April 28-29 meeting minutes, released Wednesday, said policy makers expected the pace of recover would continue to be dampened in 2010. March, the Fed said, did come in like a lion before showing some improvement by the end of the month.

Labor markets conditions deteriorated further in March, the Fed said. Industrial production fell substantially, in the month and existing home sales also fell.

The Fed reported, commercial bank credit contracted in March, but consumer spending, critical to business in Asia and Europe, firmed in the first quarter, despite the rising unemployment rate and significant financial strains, the Fed said.

In numbers, the central bank said the U.S. economy could contract up to 2 percent in 2009, compared to a previous estimate of a contraction of 1.3 percent. Unemployment could reach 10 percent, the Open Market Committee said.

On Thursday, the Nikkei average dropped 0.86 percent, while the Hang Seng index in Hong Kong dropped 1.58 percent. The Singapore Straits Times fell 2.57 percent. In Australia, the S&P/ASX index declined 0.28 percent.

In Europe, markets fared about the same. The FTSE 100 in London was down 2.17 percent in midday trading. The DAX 30 in Frankfurt fell 1.51 percent, while the CAC 40 in Paris fell 1.46 percent. The broader DJStoxx 600 fell 1.39 percent.

The automobile sector also provided investors with a jolt Wednesday, as sources said U.S. Treasury planned to loan General Motor Corp.'s financial firm GMAC $7.5 billion to build up cash reserves on the chance the economy would deteriorate further, The Detroit News reported.

It was an expected jolt. The Treasury's recently concluded stress tests indicated the firm, which lends to dealerships and consumers, would need to raise $11.5 billion. With Chrysler LLC in bankruptcy and GMAC slated to take up the slack for Chrysler Financial, the Treasury had already said it was willing to add to the $5 billion GMAC has already received.

With no official release in hand, how the deal was structured was still unclear, but the numbers suggest the government could emerge as the majority shareholder in the lending company in what has proved to be one of the most turbulent times the industry has ever faced.