Tuesday, November 04, 2008

The Trickle Down Continues: U.S. Industries Feeling the Pinch of a Rocky Third Quarter

Sources: Financial Times, US Factory Orders Continue Sharp Decline; Financial Times, US Car Sales Sink to Lowest Level for 25 Years; Financial Times, US Personal Spending Drops in September; Des Moines Register, Principal Net Income Falls 61 Percent

U.S. consumers are reacting to the economic downturn by saving more and spending less. For the first time since 1991, consumer spending dropped, falling by 3.1% in the third quarter of 2008 from the same time period in 2007. U.S. personal spending dropped by 0.3% even while personal income rose 0.2%. In September 2008, the U.S. savings rate rose half a percentage point to 1.3%.

Consumer cutbacks are no surprise to some of the country’s consumer service industries: the U.S. automobile industry announced that light vehicles sales fell to a 25-year low in October 2008. Sales analysts for Toyota and General Motors said that the companies are more concerned than they were one month ago: consumer confidence is down so much that sales were down from 12.6 million in September to 10.3 million in October. A GM marketing chief said that October was “probably the worst industry sales month in the post-world war two era.”

Industrial factory orders dropped 2.5% from August as businesses cut back on purchases of computers, steel, and other industrial inputs. The drop was much worse than the 0.7% drop that analysts had predicted, and all of this is on top of a revised 4.5% drop in August.

Principal Financial Group, a Des Moines, Iowa-based insurance and financial services company reported a 61% drop in its net income from one year ago. In the third quarter of 2007, Principal reported net income of $231.2 million, but in the third quarter of 2008, Principal reported net income of $90.1 million. The company’s net income includes losses from holdings in Lehman Brothers and Washington Mutual shares.

Questions for discussion:

1) There is a lot of discussion about what the federal government can and should be doing to ease the pain of the credit crisis from Wall Street to Main Street, but do you think there are any effective grassroots efforts that could help to ease the pain at a local level?

2) Do these “shocking” statistics signal an end to the buy-now, pay-later consumer mentality in the U.S.?

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