While you were sleeping: US economy shrinks, stocks drop

Monday 2nd March 2009

The US economy had its biggest slump since 1982 in the fourth quarter, shrinking at a worse-than-expected annual pace of 6.2% as consumer spending dwindled and exporters shipped fewer goods.

The contraction was more severe than the 3.8% rate the Commerce Department had predicted. Other reports underlined the prospects for the world's biggest economy to remain weak until at least mid-2009. The Reuters/University of Michigan consumer sentiment index fell to 56.3 in February from 61.2 in January, marking the first decline in three months.

The Institute for Supply Management-Chicago Inc. survey showed business activity shrank for the fifth straight month in February.

The dollar rose to a three-year high against a basket of six major currencies as the prolonged US recession stoked demand for the greenback as a haven.

The dollar gained to $1.2665 per euro on Friday in New York from $1.2744 and weakened to 97.60 yen from 98.52. The euro fell to 123.94 yen from 125.52.

In his weekly radio address, President Barack Obama said he is preparing for a battle in Congress to push through his US$3.55 trillion budget.

"Passing this budget won't be easy because it represents real and dramatic change," Obama said. "It also represents a threat to the status quo in Washington."

Stocks fell, led by a 39% plunge in Citigroup after the government said it would convert as much as $25 billion of its preferred stock to ordinary shares, giving it a 36% stake in the lender. Analysts have speculated the Citigroup may need a fourth round of government aid in coming months.

The bank's shares fell 39% to US$1.50, giving it a market value of US$8.2 billion. Bank of America fell 26% to US$3.95. The two lenders have led the Dow Jones Industrial Average on a roller-coaster ride, leading the index higher one day and pacing its decline the next.

American International Group Inc. may get as much as $30 billion in new government capital after posting a record quarterly loss, Bloomberg and Reuters reported, citing people familiar with the matter. AIG may also be permitted to make lower payments on government loans, according to the report. The shares fell 19% to 42 cents on Friday.

General Electric fell 6.5% to US$8.51 after announcing plans to cut its quarterly dividend by 68% to help it conserve cash in the face of the prolonged downturn. General Motors dropped 5.5% to US$2.25.

Exxon Mobil dropped 4.3% to US$67.90 as the price of oil fell in response to the weak US GDP figures. Oil paced a slide in commodities such as copper, aluminium and zinc.

Crude oil for April delivery fell almost 6% to US$42.55 a barrel on the New York Mercantile Exchange.

Metals also sank after Japan on Friday reported that industrial output tumbled 10% in January.

Copper for three-month delivery dropped more than 5% to US$3,315 a metric ton on Friday. Aluminum fell 1.6% to US$1,342.25 a ton and Zinc for three-month delivery dropped 0.9% to US$1,128 a ton.

Gold futures for April delivery fell 10 cents to US$942.50 an ounce in New York.

Banks also led a decline in European shares. The Dow Jones Stoxx 600 Index dropped 1.8% to 172.92, led by a 22% drop in Lloyds Banking Group amid expectations it will become the second UK bank to effectively be nationalized after posting a 10 billion pound loss for 2008. Talks with the government were "well advanced," Lloyds said.

A rescue for Lloyds would follow the government's steps to save Royal Bank of Scotland that may leave it holding 95% of the stock of the unprofitable lender.

Meantime, development banks such as the World Bank have offered US$32 billion over two years to help East European banks stave off collapse.

Germany's DAX 30 fell 2.5% to 3843.74 and France's CAC 40 dropped 1.5% to 2702.48. In London, the FTSE 100 Index declined 2.2% to 3830.09.

Comments from our readers

No comments yet