Monday, February 9, 2009

Looks more like '46 every day

There are rumours floating around today that Boeing and Airbus will scale back production by 35% over the next two years as their airline customers are finding it almost impossible to finance orders for delivery in the 2010-2012 time frame. Cancels and deferrals look as though they will exceed new orders this year. This is proving to be a sustained downturn unlike the post 9/11 quick rebound template that many corporate boards have been using as the basis of their forecasts. This production scaleback would indicate that a second round of job cuts is about to sweep the economy as companies are faced with the stark fact that the turnaround is still some way off. The 2009 forecasts for demand made at the end of last year are being discarded in the face of a worse than forecast downturn. Emerging markets that had been held out as the counterbalance to established economies have been shown to be built on the same foundation of sand. As workers are laid off so they stop being consumers and so firms see their sales decline .

The scope for a further round of major job cuts is made all the more likely by the snail like progress of the US stimulus package. Allowing for a bad tempered and decidedly partisan passage of the $800 billion today the final legislation is unlikely to be drafted and signed into law until the end of the month. The vast majority of the funds are unlikely to start flowing until the tail end of this year and a turnaround or stabilization is unlikely until early 2010. Shops,autos,banks,airlines and hotels all face further layoffs. A major worry will be if the profitable sectors of the economy like health care,pharmaceuticals , tech and media follow Boeing and decide during Q2 that the outlook is looking bleak and opt for a further round of job cuts . Instead of 9% unemployment the number might grow to 12%.

There is some good news. Press reports over the weekend hint that the Treasury is set to guarantee a floor value on contaminated assets. This would enable pension funds to step into the market and enable markups on written down assets at some banks. However, the lack of transparency in the banks year end numbers would indicate that they will have to bite the bullet and take more write downs and raise more capital. Pre-privatization of the banks still looks likely.

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