There are some saving graces to the economic story. While the Goldilocks, soft-landing scenario is imperiled by the deepening financial squeeze, it is not yet completely dead in the water. Recent numbers from the Institute of Supply Managers show an expanding economy in manufacturing and services. Same-store chain sales came in above estimate for August. Personal incomes after tax and after inflation are still rising by 3.8 percent for the 12 months ending in July.
Silver linings aside, the commercial paper market for short-term business loans continues its deep south migration with an almost unprecedented $300 billion evaporation. In the months ahead, nearly a trillion dollars of commercial paper will have to be rolled over. It's hard to say where all this money is going to come from in today's risk-averse environment. At present, investors are more than willing to finance short-term Treasury paper at roughly 4 percent, but so-called asset backed corporate paper is going unfunded despite a better-than-6-percent return. Exactly the same problem is cropping up in the London interbank loan market, as LIBOR rates have jumped nearly a hundred basis points in recent days.
The main point here is that if businesses are unable to access working capital to fund their daily needs, then these firms will be forced to shrink their operations. That means layoffs.
American companies are already experiencing their first profit decline in over five years. Non-financial domestic corporations have experienced negative profit margins and falling profits over the past three quarters. Treasury Department tax collections from business income have fallen off a cliff. Wall Street analyst Dan Clifton revealed that corporate tax revenues fell 29 percent in August compared to a year ago. And these corporate tax collections have now dropped in three of the past four months. A year ago, they were rising by more than 20 percent.
So while big companies are still benefiting from overseas-based profits, the domestic story is rapidly deteriorating. Moreover, it's a safe bet that the financial sector will deliver downside surprises as today's mortgage mess continues to unwind.
Unfortunately, not a single one of these critical economic issues came up in this week's GOP debate in New Hampshire. But make no mistake about it, the financial credit crunch and the economic downturn is going to loom large in next year's election.
As for the Federal Reserve, it is of course an independent agency. None of its members will be standing in front of voters come November 2008. Nonetheless, it is the Fed, more than any other policy lever, that holds the all-important key to our economic future. Disappointingly, so far it has downplayed the disruption in financial markets.
If central bankers would come to their analytical senses, they would appreciate that today's financial panic is itself sufficient reason to slash the Fed funds target rate by at least a full percentage point from today's 5.25 percent to something around 4 percent. Such a move would be a much-needed injection of confidence into a rattled marketplace.
Earlier today, former Fed chair Alan Greenspan compared the current financial turmoil to that of 1987's stock plunge and the 1998 dislocation of giant hedge fund Long Term Capital Management. Fortunately, financial panics don't occur very often. But what we have before us today is a modern version of the old fashioned run on the bank. The only difference is that the bank today is the global money market.
The Fed can fix this. But they better get moving.