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Here comes the auto industry bailout, and fiscal-stimulus pagkage II

Staff Report • Nov 10, 2008 at 12:00 AM

This week, the markets are likely to focus on the evolving response of the incoming administration to the intensifying recession. Global Insights reports that the economic indicator calendar is relatively light, with some positive news on trade offset by expected negative news on retail sales. President-elect Obama will have ongoing meetings with top economic advisors and congressional leaders, and Global Insights expect a domestic auto industry support package-with possible capital infusions to affiliated credit corporations and debt guarantees-will be crafted shortly. We also expect a large fiscal-stimulus package will be assembled in the next few weeks, to include both spending increases in selected target areas and personal tax reductions. The package is likely to be close to $200 billion (1.5% of GDP). The economic indicator calendar next week looks relatively light. On the positive side, we should see a solid improvement in the September trade balance on lower crude oil import prices. However, October retail sales are expected to decline by a sharp 3% on lower auto and chain store sales, and early-November consumer sentiment is expected to remain at recessionary levels. KEY U.S. DATA RELEASES THIS WEEK Thursday – Trade Balance (Sep.) What to Look For The trade deficit is expected to narrow from $59.1 billion in August to $57.0 billion in September. Implications Global Insights expects the trade deficit to narrow to $57.0 billion in September, from $59.1 billion in August, largely on a lower bill for imported oil, with both prices and volumes down from August. We expect aircraft exports to have bounced up temporarily ahead of the Boeing strike. The services surplus will improve, since NBC's payment for the Olympics broadcast rights reduced the surplus temporarily in August. We expect both export and import volumes to be down, partly reflecting the disruption to trade caused by September's hurricanes. But lower trade volumes are likely to be a feature of future reports as well, as the global recession takes its toll on world trade. Friday – Retail Sales (Oct.) What to Look For Top-level retail sales to be down by 3.0% last month. Auto sales likely plummeted. Implications Retail sales fell an estimated 3.0% in October, pulled down by a plunge in auto sales, declining chain-store sales, and a 16% drop in gasoline prices. Unit sales of new light vehicles fell from an annual rate of 12.5 million in September to a 26-year low of 10.5 million in October. Chain-store sales suggest widespread weakness, as consumers are scrimping on discretionary purchases. Falling asset prices are prompting households to increase their saving rate in order to rebuild financial assets. Accelerating job losses and tightening credit conditions continue to darken the retail environment. Real consumer spending is projected to fall at a 3.0% annual rate in the fourth quarter, almost matching the third quarter's 3.1% decline, which was the worst result since the spring of 1980. Friday – Michigan Consumer Sentiment Index (PreliminaryNov.) What to Look For Sentiment to hold steady at recessionary levels near 57.0. Implications The Reuters/University of Michigan's index of consumer sentiment is expected to hold roughly steady at 57.0 in early November, a shade below its October average of 57.6, but well below its year-earlier level of 76.1. This is deep into recession territory, so no further erosion of sentiment is anticipated. Falling gasoline prices are boosting purchasing power, offsetting the anxiety caused by a worsening employment outlook and a volatile stock market. There also may be some underlying support from the resolution of the presidential elections.

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