Crisis comes to the real economy

One of the curious features of 2008 was how little impact the recession seemed to have on everyday life for most of us. Indeed, aside from a few early bears, the hot debate seemed to be whether or not there would be a recession at all. As late as September, traders on Intrade were betting against a recession in 2008. Despite all this, the NBER recently established that the US economy went into recession in December of 2007.

While the recession was drifting by like an iceberg in the background, the financial system was freezing up. The violent tremors occured in June 2007 when two Bear Stearns' hedge funds laden with mortgage debt became publicly insolvent. Bear itself went under in February of 2008 and by July the dominoes really started to fall in the financial sector.

Now, the fallout in the real economy is starting to come fast and furious. This is scary stuff and still we've only seen the tip of the iceberg.

1. Nortel is bankrupt.

Nortel Networks Corp., the phone equipment maker that was once Canada’s largest company by market value, filed for bankruptcy protection after losses mounted and financing dried up amid a deepening recession.

The century-old company, North America’s biggest maker of phone gear and worth about $250 billion at its peak in 2000, fell victim to reduced spending by customers such as Verizon Communications Inc. and competition from Cisco Systems Inc. The company made the filing a day before a $107 million interest payment was due...

2. Retail sales has collapsed.

Retail sales are a key portion of consumer spending and real retail sales have fallen off a cliff.

And retailers are going bankrupt:

• Gottschalks - 1904-2009 - R.I.P.
• Goody's - 1953-2009 - R.I.P.

3. Shipping has is slowing to a crawl across the globe.

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster."

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

:::::

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

:::::

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.

Financial Armageddon links to a Wall Street Journal article on the state of the U.S. freight industry: Freight Haulers Slam on the Brakes.

In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.

"We're settling in for nuclear winter in the first half of 2009," says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.

He's not alone. Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more. As a result, companies in industries ranging from trucking to railroads to ocean shipping are scaling back sharply. 

:::::

At a Kenworth plant in Renton, Wash., more than 400 employees will lose their jobs when the company, a subsidiary of Paccar Inc., suspends making heavy-duty highway trucks at the plant next year, according to Don Hursey of the machinists union, who says he has been briefed on the plans. Just a few years ago, the plant produced 50 big rigs a day, he says. A Kenworth spokesman declines to specify how many workers will lose their jobs.

"This is the tip of the iceberg," Mr. Hursey says. "It's going to be a disaster next year for the entire industry. I'm scared to death."