(WASHINGTON) US employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly decline in nearly five years as the nation’s labour markets weakened steadily, a government report yesterday showed.

The Labor Department said that last month’s cut followed an upwardly revised loss of 22,000 jobs in January rather than the 17,000 reported a month ago. It also said that only 41,000 jobs were created in December, half the 82,000 originally reported.

‘This confirms the fears that have been lurking in the financial markets in recent weeks. The

probability of a US recession is at more than 50 per cent,’ said Richard DeKaser, chief economist for National City Corp in Cleveland.

‘The Fed has to be more aggressive,’ he added. The US central bank is expected to cut interest rates again later this month and yesterday, just before the payrolls report became public, announced new measures to add liquidity to severely strained credit markets that are near seizing up.

The Federal announced that it was increasing the amount of money it will auction to banks this month to US$100 billion. It will make two moves to increase liquidity in the credit markets. First, it will increase the size of its March 10 and 24 auctions to banks to US$50 billion each. The auctions had been set for US$30 billion apiece initially. Fed officials said that they are prepared to move to even larger amounts at future auctions if necessary.

The Fed also said that, starting yesterday, it will begin a series of repurchase transactions expected to reach US$100 billion.

US Treasury debt prices shot up in anticipation that the Fed will cut interest rates while stock futures weakened sharply. The US dollar’s value was at a record low against the euro after the unfavourable employment report was issued.

The back-to-back January and February job losses were the first consecutive monthly declines since May and June of 2003.

The February jobs report was more bleak than expected.

Economists surveyed by Reuters forecast that 25,000 jobs would be added to payrolls last month.

They had forecast that the unemployment rate would edge up to 5.0 per cent.

Department officials said that February’s job losses were the largest for any month since March 2003, when 212,000 jobs were cut.

During February, the national unemployment rate eased to 4.8 per cent from 4.9 per cent in January, but that was because fewer people were in the labour force. The department said that the number of people in the workforce fell by 450,000 in February.

Job losses were widespread. Some 52,000 jobs were lost in the manufacturing industries, the largest decline since July 2003 when 92,000 jobs were cut. Construction businesses eliminated another 39,000 jobs on top of 25,000 that were cut in January, a reflection of the housing industry’s deepening woes.

Retail industries also shed jobs last month, dropping 34,000 people off their payrolls, a possible reflection of concern from businesses that hard-pressed consumers are likely to begin pulling back sharply on spending.

Source: Reuters, AFP (The Straits Times 8 Mar 08)

Net worth for households decreased by US$532.9 billion (S$739.5 billion) from the previous three months, the first decline since the third quarter of 2002, according to the Fed’s quarterly Flow of Funds report released on Thursday. Housing-related net worth dropped by US$176.4 billion.

Lower home and stock prices and reduced access to loans are prompting Americans to spend less, driving up foreclosures. A slowdown in consumer spending, which accounts for two-thirds of the economy, threatens to push the US into a recession.

‘Consumers are being squeezed from several directions,’ Fed governor Frederick Mishkin said in a speech this week.

Reduced household wealth, combined with a weakening job market and near-record fuel prices ‘are likely to restrain spending growth in the period ahead’, he said.

Owners’ equity as a share of their total real estate holdings fell to 47.9 per cent, the lowest since quarterly records began in 1951, from 48.9 per cent in the prior period.

The Fed based its calculations on a gauge of home prices published by the Office of Federal Housing Enterprise Oversight. Had the central bank used a measure of home prices developed by S&P/Case-Shiller instead, the loss in net worth would have been almost three times as much, according to JPMorgan Chase economist Michael Feroli in New York.

The drop in housing-related household net worth from October to December followed a decline of about US$600 million in the previous three months. Mortgage borrowing by households rose at a 5 per cent annual pace, the smallest gain since 1997.

Total borrowing by consumers, businesses and government agencies rose at an annual rate of 7.7 per cent last quarter compared with an 8.8 per cent gain the prior quarter, as borrowing by businesses climbed.

Total borrowing by households increased at a 5.6 per cent pace, and business borrowing rose at an annual pace of 12 per cent.

Borrowing by state and local governments climbed at a 7.6 per cent rate after rising 6.5 per cent the prior quarter, the Fed said.

Federal government borrowing rose at an annual pace of 5.1 per cent after increasing at an 8.8 per cent rate.

Source: BLOOMBERG NEWS (The Straits Times 8 Mar 08)

WASHINGTON – THE United States unexpectedly lost jobs last month for the second consecutive month, adding to evidence that the economy is in a recession.

Payrolls fell by 63,000, the most in five years, after a revised decline of 22,000 in January, the Labour Department said yesterday in Washington.

The jobless rate declined to 4.8 per cent, reflecting a shrinking labour force as some people gave up looking for work.

‘All the lights are flashing red,’ said Mr Nariman Behravesh, the chief economist at Global Insight in Massachusetts, in an interview with Bloomberg Television. ‘We’re in a recession. I don’t think there is any doubt about it at this point.’

Treasury notes soared after the report on concern that the weakening labour market – combined with lower home prices, higher fuel bills and a global credit squeeze – will force consumers to cut spending further.

Minutes before the figures were released, the US Fed said it would expand two short-term auctions this month to US$100 billion (S$139 billion) to address ‘heightened liquidity pressures’ in markets.

Traders now expect Fed chairman Ben Bernanke and his team to cut their benchmark interest rate by at least three-quarters of a percentage point at or before their March 18 meeting.

Economists had projected that payrolls would rise by 23,000, following a previously reported 17,000 drop in January, according to the median of 76 forecasts in a Bloomberg News survey.

The jobless rate was forecast to rise to 5 per cent from January’s 4.9 per cent, with estimates ranging from 4.8 per cent to 5.2 per cent.

Revisions reduced by half the 82,000 increase in payrolls previously reported for December last year.

Service industries, which include banks, insurers, restaurants and retailers, added 26,000 workers last month. Retail payrolls fell by 34,100, the biggest drop in more than five years.

Payrolls at builders fell 39,000, the eighth consecutive month of cutbacks.

Home builders are trimming staff as the biggest housing slump in a quarter century deepens. Commercial building projects are also declining, indicating that firings at non-residential builders are likely to rise.

The real estate recession and financial market meltdown have led to growing dismissals at banks, mortgage and management firms.

‘There’s significant weakness in the job market because of construction declines,’ said Mr David Berson, the chief economist at California-based PMI Group, the second-largest US mortgage insurer. ‘For the next six months or so, we may get small negative numbers on payrolls.’

Manufacturing payrolls dropped by 52,000, the biggest decline since July 2003, after falling by 31,000 a month earlier. Economists had forecast a drop of 25,000.

Americans, whose spending accounts for more than two-thirds of the economy, are less upbeat about finding work, a Conference Board report showed last week. The share of consumers who said that jobs are plentiful fell and the proportion who said jobs are hard to get jumped, pushing consumer confidence down to a five- year low last month.

‘The economic situation has become distinctly less favourable,’ Mr Bernanke said in testimony to Congress last week.

The Fed chairman referred to ‘downside’ risks for the economy four times, including ‘the possibilities that the housing market or the labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further’.

Source: REUTERS (The Straits Times 8 Mar 08)

(NEW YORK) The Federal Reserve says economic growth has slowed in eight of 12 US regions since the start of the year, hurt by faltering retail sales, manufacturing and a continued decline in housing.

‘Two-thirds of the districts cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth,’ the central bank said in its regional business survey, known as the Beige Book, on Wednesday.

The report provided anecdotal evidence of a cooling economy that echoed reports this week that showed a contraction in manufacturing and services last month.

Fed chairman Ben Bernanke told lawmakers last week that the central bank is prepared to lower interest rates further as needed to avert a deeper downturn.

The report noted that retail activity in most districts was weak or softening. Manufacturing was sluggish or have slowed in about half the districts.

Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by its meeting on March 18. Policy makers have lowered the rate by 2.25 percentage points since September to 3 per cent.

The Fed report also said that almost all districts reported ‘upward pressure on prices’ from higher raw materials and energy costs, though companies reported ‘mixed success’ in passing along costs in higher prices.

The Beige Book said housing remained a drag on the US economy. ‘Residential real estate markets generally remained weak,’ the report said, citing ‘tight or tightening credit standards’ in most districts.

Scarce credit, bloated inventories and falling prices continue to depress housing markets. Sales of existing homes fell in January to the lowest level since records began nine years ago, the National Association of Realtors said last month.

‘Growth risks are much more severe in the near term’ for the Fed, Bruce Kasman, chief economist at JPMorgan Chase, said. ‘Growth is pretty much stagnant right now.’

Companies reduced workers last month, the first reductions in the US in almost five years, a private report based on payrolls from ADP Employer Services showed on Wednesday.

The economy expanded 0.6 per cent at an annualised pace last quarter. Fed officials lowered their projections for economic growth by half a percentage point this year, according to quarterly figures published last month.

‘I continue to expect a period of economic weakness in the near term,’ Fed governor Frederic Mishkin said on Monday. ‘With the economic outlook having deteriorated significantly and financial markets under considerable stress, the FOMC will face significant challenges.’

The Beige Book’s regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 US states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

The Beige Book was prepared by the Boston Fed based on information collected on or before Feb 25.

Source: Bloomberg (Business Times 7 Mar 08)

FINANCIAL guru Jim Rogers painted a doom-and-gloom picture of the United States economy yesterday and predicted that Singapore’s two investment companies would lose money on their recent investments in beleaguered banking giants.

Singapore-based Mr Rogers said investing billions of dollars in banks at this time, with the US financial sector in dire straits, was the wrong move.

He believes ‘banks will fall further’, hence his strategy of ‘shorting investment banks on Wall Street’, including Citigroup and mortgage lender Fannie Mae. ‘Shorting’ means investing on the assumption that the shares will fall further.

Mr Rogers, who co-founded the Quantum Fund with billionaire George Soros in the 1970s and predicted the start of the commodities rally in 1999, said he was concerned by the recent bank deals made by Temasek Holdings and the Government of Singapore Investment Corporation (GIC).

‘It grieves me that Singapore is buying into these things,’ said Mr Rogers.

GIC pumped in 11 billion Swiss francs (S$14.7 billion) for a 9 per cent stake in Swiss bank UBS in December and invested US$6.88 billion (S$9.58 billion) in Citigroup a month later. In December, Temasek bought a US$4.4 billion stake in Merrill Lynch.

UBS shares have fallen by more than 30 per cent this year. Citigroup is down over 20 per cent, while Merrill Lynch is off about 5 per cent.

Mr Rogers told reporters at an ABN Amro product launch that he remained bullish on commodities but extremely bearish on equities, bonds and the greenback.

‘The only bull market I know of in the world right now is the commodities market,’ he said. ‘We’re only one-third of the way through the bull market.’

He also warned that inflation was going to get worse: ‘Demand is going higher at a time when there are supply constraints. Food inventories are at their lowest in 40 years.’

Oil prices also have the potential to go much higher, he said, adding that the US Federal Reserve was making the same mistake Japan did in the 1990s when it wanted to bail out everyone.

The US should have bitten the bullet instead of trying to put on ‘band-aids’, he added, referring to the Fed’s move of cutting interest rates to stave off a recession yet risking stoking the inflation fire.

‘The central bank is making disastrous mistakes,’ said Mr Rogers, adding that he was also ‘extremely pessimistic’ on the US dollar. The currency traded near record lows to the yen and Swiss franc yesterday.

Mr Rogers further forecast that the US sub-prime crisis would continue to haunt the world for a year or two. Even after it has ceased, he said, there will still arise other kinds of loan problems, such as with credit cards and cars.

Source: The Straits Times 6 Mar 08

WASHINGTON – UNITED States regulators are watching credit card and commercial construction loans for signs that they may be the next trouble spots as strained financial markets constrain credit.

The housing downturn, with its epicentre in the sub- prime mortgage market, stayed atop the list of concerns. But regulators and Federal Reserve officials expressed concerns on Tuesday that credit risks may extend beyond mortgages.

Fed chairman Ben Bernanke said on Tuesday that credit-weary banks may be better off accepting lower home loan principal amounts rather than the bigger losses that would come from foreclosures.

He warned that mortgage delinquencies and foreclosures would likely rise as house prices fall further.

Mr Bernanke’s second-in- command, Mr Donald Kohn, said at a Senate Banking Committee hearing on the same day that the Fed was also keeping a close eye on credit card, home equity and commercial real estate loans as banks cope with a widening range of credit risks.

‘Federal Reserve supervisors are monitoring these consumer loan segments for signs of spillover from residential mortgage problems, particularly in regions showing home owner distress.

‘And they are paying particular attention to the securitisation market for credit card loans,’ he said. Mr Kohn added that commercial real estate is ‘another area that requires close supervisory attention’.

He noted that while personal bankruptcy rates remained below levels prior to bankruptcy law changes implemented in 2005, they ticked higher over the first nine months of last year and ‘could be a harbinger of increasing delinquency rates on other consumer loans’.

Despite those strains, Mr Kohn said the banking sector remained sound and he saw no threat to banks’ viability.

The credit mess that began with failing US sub- prime mortgage loans has left banks saddled with tens of billions of dollars in bad debts, prompting them to tighten lending standards. That has slowed the flow of cash to firms and consumers who power the US economy.

US Comptroller of the Currency John Dugan echoed concerns that the credit troubles may spread beyond mortgage loans.

‘Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration,’ he said.

‘We expect losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are largely held on banks’ balance sheets,’ he added.

But in a sign of how the Fed is conflicted in combating the competing threats of slowing growth and rising prices, another Fed official stressed that inflation was his top concern. ‘Containing inflation is the purpose of the ship I crew for,’ said Dallas Federal Reserve president Richard Fisher.

‘If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient,’ he said.

Source: REUTERS (The Straits Times 6 Mar 08)

Selling may be the reflexive response by shareholders who have watched the value of their assets decline in step with economic indicators, but investment advisers contend that they should consider buying instead. Recessions tend to be short, and by the time one is widely acknowledged, they say, investors have often sold just in time to miss the recovery that lies around the corner.

‘People should be preparing for the next upswing because the downturn is already priced in,’ advised Ron Muhlenkamp, manager of the Muhlenkamp Fund.

Brendt Stallings, a fund manager for the TCW Group who specialises in shares of medium-size companies, suggests that investors may not be fearing the worst but that they certainly have it on their minds. And that has already registered in stock prices.

Portfolio managers who foresee a rebound concentrate their buying on segments of the economy that tend to outperform as a new growth cycle gathers momentum. They are not allocating all of their resources to such recovery plays, though, and are making allowances  for conditions that seem to be different from those of other recessions.

‘The normal rotation that occurs is a move into financials and consumer cyclicals,’ Mr Muhlenkamp noted before conceding that ‘normal’ does not quite describe the financial sector and such cyclical industries as housing these days. He likes some financial stocks, notably the mortgage buyer and seller Fannie Mae, but he prefers consumer-oriented companies like appliance maker Whirlpool and two transportation companies: Harley-Davidson and Winnebago.

Continuing with his eclectic list of companies that get people from here to there, he expects the stocks of Boeing and Caterpillar to rise with, or ahead of, the economy. A point in their favour, he said, is the level of the US dollar; it is far weaker than it was during the 2001 recession, giving American exporters a competitive edge.

Barbara Walchli, manager of the Aquila Rocky Mountain Equity fund, is another advocate of transportation stocks. The sector, she said, is ‘usually one of the groups that moves fastest coming off the bottom’.

One of the fastest of the fast may be Knight Transportation, a midsize trucking concern. Ms Walchli lauded Knight’s management for keeping the company’s books free of debt, unlike rival Swift Transportation, which she said had borrowed heavily to take itself private. She also likes Avnet, a distributor of electronic components to businesses. It fits well with her expectation that businesses will open their wallets before consumers as the economy emerges from its torpor.

Mr Stallings also foresees business spending picking up sooner, and he prefers potential beneficiaries of the trend that have a global reach.

Examples include Spirit AeroSystems, a supplier of commercial airline assemblies and components, and two companies, Cognizant Technology Solutions and Resources Connection, that provide outsourced labour to fulfil administrative or technical services for other businesses.

He also expects consumers to do their fair share in helping the economy bounce back. Among his favourite recovery plays here are three chains of different sorts: P F Chang’s China Bistro, which operates restaurants; pet supply company PetSmart; and Dick’s Sporting Goods.

‘It’s an interesting time to be a bottom-up fundamental growth manager,’ Mr Stallings said. ‘Everything is on sale across the board.’

Before buying stocks to anticipate a blast-off out of recession, investors must buy the premise that a recession is here. Many do not, including John Lynch, chief market analyst at Evergreen Investments.

‘The classic ingredients for a recession have been tight monetary policy and runaway inflation, especially wage inflation, and neither of those exists today,’ Mr Lynch said, despite some signs that inflation has been increasing.

He acknowledges that a third sign of recession – fear – is here, and then some, but he still describes the economy as being in ‘the late stages of expansion’ or possibly ‘knocking on the door of a recession’. That is only likely to postpone the reckoning until next year, he said.

In his view, the best companies in which to invest between now and then are in defensive areas like health care and basic consumer items, or in segments of technology that derive much of their revenue from businesses. Despite his less positive economic outlook, he, too, anticipates strong capital spending.

Defensive selections include Procter & Gamble, Pfizer and Johnson & Johnson. Among tech stocks that he mentioned are Intel, Microsoft and Oracle.

Even investment advisers who say the economy is approaching a trough prefer to hedge against the possibility that they are wrong.

David Fording, co-manager of the William Blair Growth fund, prefers consumer businesses that derive much of their sales abroad, where economic conditions appear less fragile. Mr Fording said he recently bought shares of the retailer Coach for that reason.

‘There are a number of growth drivers for Coach in the US and, more important, it’s a global brand,’ he said. His more conventional recovery choices include Fastenal, a supplier of construction and industrial supplies, and McCormick & Schmick’s Seafood Restaurants.

Such domestically focused companies are worth owning ‘if you feel that there’s a decent probability that we’ll make it through this rough patch’, Mr Fording said.

How rough will it be? He cautioned investors to expect conditions over the short term that are uncomfortable, but not necessarily unprofitable.

‘Regardless of whether we see really negative headlines for the next three to six months,’ he said, ‘it might very well be the case that the market climbs the wall of worry and looks past

the bad news to a recovery in 2009′.

Source: NYT (Business Times 5 Mar 08)

NEW YORK – BILLIONAIRE investor Warren Buffett said the United States economy is in a recession and that stocks are ‘not cheap’ despite recent declines.

He also said he is no longer offering to guarantee US$800 billion (S$1.12 trillion) of municipal bonds backed by MBIA, Ambac Financial Group and FGIC, three bond insurers that ran into trouble from backing riskier debt.

Speaking on CNBC television on Monday, Mr Buffett said the economy is heading south even though gross domestic product (GDP) has not yet fallen for two straight quarters, a definition that many economists use to identify a recession.

He also said the slowing economy and the housing slump are hurting his insurance and investment company Berkshire Hathaway, whose 76 operating units sell things such as bricks, real estate brokerage services and underwear.

‘By any common sense definition, we are in a recession,’ Mr Buffett said. ‘Business is slowing down. We have retail stores in candy, home furnishings and jewellery. Across the board, I’m seeing a significant slowdown.’

Last week, the Commerce Department said America’s GDP rose at an annual rate of just 0.6 per cent in the fourth quarter.

Mr Buffett, 77, is one of the world’s richest people and is regarded by many as America’s greatest investor. Forbes magazine last September estimated his net worth at US$52 billion.

He said economic conditions have not deteriorated to the levels of 1973 and 1974, when there was a deep recession also marked by rising oil prices and falling stocks.

On Feb 12, Mr Buffett offered to reinsure US$800 billion of relatively safe municipal bonds, which are typically used to finance things such as hospitals, roads and schools. But he offered to back the bonds only at a steep premium. His offer also excluded risky debt, including securities tied to US sub-prime mortgages.

Bond insurers rejected the offer and have been seeking new sources of capital. Some have also been considering separating their municipal bond business from riskier businesses.

Mr Buffett on Monday said his earlier offer is now ‘not on the table’, and added that ‘we tossed our hat in the ring and they tossed the hat back’.

Source: REUTERS (The Straits Times 5 Mar 08)

‘Efforts by both government and private sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,’ he said in a speech yesterday. ‘Principal reductions that restore some equity for the home owner may be a relatively more effective means of avoiding delinquency and foreclosure.’

Mr Bernanke’s call goes beyond the stance of the Bush administration and previous Fed comments.

By comparison, the central bank’s Feb 27 report to Congress called for lenders to ‘pursue prudent loan workouts’ through means such as modifying mortgage terms and deferring payments.

‘Delinquencies and foreclosures likely will continue to rise for a while longer,’ Mr Bernanke said in his comments to the Independent Community Bankers of America.

‘Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest rate resets will, nevertheless, impose stress on many households.’

In the past, home owners could refinance, though that option is now ‘largely’ gone because sales of bonds backed by sub-prime mortgages ‘have virtually halted’, Mr Bernanke said. ‘This situation calls for a vigorous response.’

He acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.

‘They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.’

Mr Bernanke said by cutting the amount of the loan, this ‘may increase the expected payoff by reducing the risk of default and foreclosure’.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 5 Mar 08)

(NEW YORK) Billionaire investor Warren Buffett said yesterday that the US economy is in recession and that stocks are not cheap, despite recent declines.

Speaking on CNBC television, Mr Buffett also said that he is no longer offering to guarantee US$800 billion of municipal bonds backed by MBIA Inc, Ambac Financial Group Inc and FGIC Corp, three large bond insurers.

He said that ‘from a common-sense standpoint right now, we’re in a recession’, though the US economy has not yet recorded two straight quarters of declining gross domestic product, a traditional indicator of recession.

He said that the environment is ‘nothing like ’73 or ’74 yet’, referring to a deep economic downturn also marked by rising oil prices, higher inflation and falling stocks. Still, he said that investors should not rule out a significant economic downturn, and that Federal Reserve chairman Ben Bernanke has a ‘very tough balancing act’ in trying to boost economic growth without kindling inflation.

Mr Buffett said that there is a fair chance that inflation may ignite in a ‘serious way’.

On Friday, his insurance and investment company Berkshire Hathaway Inc reported an 18 per cent decline in fourth-quarter profit. This stemmed in part from weakness in businesses linked to housing, including units that make bricks and carpet, and that offer real estate brokerage services.

Mr Buffett said that he was finding more buying opportunities in stocks following a 16 per cent decline in the Standard & Poor’s 500 stock index from its recent high in October. ‘I find more things to look at now than I did six months or a year ago.’

But he acknowledged that conditions have changed ‘more dramatically’ in the bond market. Berkshire last year spent US$19.11 billion on stocks and US$13.39 billion on bonds.

Falling security values and liquidity have pummelled bond insurers, which normally insure relatively safe municipal bonds but also guaranteed billions of dollars of riskier debt, often tied to sub-prime mortgages.

On Feb 12, Mr Buffett offered to reinsure US$800 billion of municipal bonds, but only at a steep premium. The offer did not include the riskier debt. Bond insurers rejected the offer and have been seeking new sources of capital or possibly breaking themselves up.

Mr Buffett yesterday said that his earlier offer was ‘not on the table’. In December, he started his own bond insurer, Berkshire Hathaway Assurance Corp.

Since 1965, Mr Buffett has transformed Berkshire Hathaway Inc into a US$216 billion conglomerate by acquiring out-of-favour companies with strong earnings and management, and investing in stocks.

Berkshire’s Class A shares closed on Friday at US$140,000. Through Friday, they had risen 32 per cent in the last year.

Source: Reuters (Business Times 4 Mar 08)

(WASHINGTON) The combined punch of sub-prime mortgage defaults and heavy debt remains the biggest risk to the health of the US economy, a panel of business economists said yesterday.

‘NABE members are increasingly concerned over the short-term risks associated with sub-prime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation,’ said Ellen Hughes-Cromwick, president of the National Association for Business Economists.

The conclusion was based on a survey of 259 members conducted between Feb 1 and 15 and updates a poll conducted in August.

Of the members polled for the NABE semi-annual Economic Policy Survey, 52 per cent said that the combined threat of sub-prime mortgage defaults and heavy debt was their No 1 concern, up from 32 per cent in August. Inflation was a distant third at 10 per cent in March, up from 6 per cent, the survey showed.

Only 9 per cent of the members polled said terrorism was now their top concern, compared with 20 per cent in August. ‘Fewer respondents support monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative,’ said Ms Hughes-Cromwick.

Just 48 per cent judged monetary policy to be ‘about right’, a drop from 72 per cent in August and 81 per cent in March 2007.

Two-thirds of those surveyed expect short-term interest rates to decline over the next six months, with about half of those respondents expecting a cut between 25 basis points and 50 basis points, NABE said.

The Federal Reserve has aggressively cut the benchmark federal funds interest rate, bringing it down to 3 per cent from 5.25 per cent in mid-September to bolster the economy against the housing downturn and credit squeeze.

The most frequently cited concerns about lower interest rates are the threat of inflation and the sense that lower rates might ‘bail out investors who should have known better’, NABE said.

Source: Reuters (Business Times 4 Mar 08)

THE US recession had already started since December 2007. I predict that the federal funds rate will drop to one per cent by September 2008. After that, we will most likely witness a rebound and rally in the market.

If the recession is more prolonged, it would at most extend by another six months to March 2009.

Investors must remember that our present recessionary cycle is very different from the US recession between July 1981 and November 1982. In one way, it is similar to the 1981-82 one because the recession hit financial institutions such as banks and savings and loans particularly hard.

The significant difference lies in the fact that we now have the sovereign wealth funds stepping in to prevent these financial institutions from closing down. In addition, we have wealth distributed from oilrich countries in the Middle East.

Singapore is positioned to ride through the stormy weather in style! In these unique circumstances,

Singapore has invested in three of the world’s most exciting banks, namely UBS, Citigroup and Merrill Lynch. We have also lined up world-class activities to ensure a continuous influx of tourist arrivals to boost domestic consumption:

• Q1 2008 – Singapore Flyer
• Q3 2008 – Singapore Grand Prix
• Q3 2009 – Las Vegas Sands Marina
• Q3 2010 – Singapore 2010 Youth Olympic Games
• Q4 2010 – Resorts World Sentosa.

These activities will allow us to meet the challenges ahead. In the event of a slowdown, Singapore businesses should take advantage of this period to upgrade themselves through higher education, visiting other countries for opportunities and consolidating.

- Clemen Chiang

CEO

Freely Business School

Singapore can weather storm

SINGAPORE had been largely dependent on the US for its export market. However, in recent years, Singapore has successfully diversified its export markets to include China and India. In addition, its ongoing projects such as the integrated resorts, the hosting of the first Formula One night race and, most recently, the hosting of the 2010 Youth Olympics, would provide plenty of opportunities for the local market especially in the construction and services industries.

Hopefully, the ongoing IR projects and the tourism dollars being projected for the F1 race in

September would be sufficient to tide us over the US slowdown.

The only other economic factor that will pose a challenge is high inflation due to the double whammy of higher prices for both petroleum and food.

As an IT security company with headquarters in the US, with Singapore as its Asean and India headquarters, we will be able to sustain our growth by tapping the current ongoing projects in Singapore, as well as growing revenues in countries such as India and Vietnam.

While striving to increase our business revenues, we have to strive even harder to keep  overheads such as travel, entertainment cost, rental and even remuneration packages to a bare minimal.

Therefore, Singapore is likely to be spared the economic meltdown in spite of the slowing US economy, as we have been taking steps to minimise our dependency on the US market. This is one giant leap of faith by the Singapore government in the right direction. In the words of Prime Minister Lee Hsien Loong: ‘We have dared to bring our dreams into reality.’

- Benjamin Low

Managing Director, South-east Asia and India

Secure Computing

I THINK a lot will depend on how protracted the US recession will be. If the US slowdown lasts for two quarters, as some economists believe, then I think the Singapore economy might not be significantly affected. Singapore is now less dependent on the US than before and is quite well plugged to the Asian twin growth engines of China and India. The Singapore economy has growth momentum on its side, with many projects like the IR, F1 and now the Youth Olympics, to stay resilient. However, if the US recession turns out to be severe, then not just Singapore but the global economy will be affected.

The steel industry, on the other hand, is going through interesting times. While 2007 was a good year for the industry, 2008 is beginning to look like an equally good if not better year. Demand for steel is going from strength to strength, not just domestically but globally.

In Singapore, demand for steel will see a further boost with more public projects in addition to the existing residential and office projects. Singapore is expected to construct a new University Town to host the Youth Olympics and there are planned expenditures to further expand our rail and road infrastructure in the coming years.

Globally, besides China and India which are consuming a lot of steel, the other two BRIC countries – Russia and Brazil – which used to be net exporters of steel are now instead buying steel. Russia – which benefited from the buoyant oil market – and Brazil – which benefited from the rise of both hard and soft commodities like iron ore and wheat – are undergoing an infrastructure boom.

With the rise of commodities, there is also strong demand for steel in the shipbuilding sectors to build vessels to carry the commodities.

- Wee Piew

CEO

HG Metal Manufacturing Ltd

A SLOWDOWN in the US economy will undoubtedly have an impact on the logistics sector and UPS, but we are confident that we will continue to grow by generating greater synergy between our businesses. Being an open economy, Singapore is naturally more susceptible to external shocks.

However, the Singapore government has been successful in attracting investments, which will provide some buffer from an external slowdown. This, complemented by growth in other regions, particularly the Asia Pacific, will provide impetus for the economy.

Asia was a key growth area for UPS in 2007, and looks set to continue this year. Growing intra-Asia trade and strong demand from China and India will continue to drive trade in the region. By aligning our supply chain and parcel delivery businesses, UPS will ensure greater synergy and more competitive offerings for our clients across Asia.

Despite the challenges and a moderated economic growth forecast, UPS is positive that the

Singapore economy is resilient and diversified enough to withstand the effect of a US slowdown.

- Mary Yeo

Managing Director

UPS

EXPERTS agree that the US economy is closer to the bottom than the top. Given this, we all must brace for ways of coping in the event of a full-blown US recession. As experience has shown us, a downtrend does not mean we are in for a crash. I would say that those of us in the direct selling industry can be resilient to an economic crunch for as long as we are able to grow and expand distributorship.

Still, it remains critical to re-think business decisions having to do with the proper marshaling of resources, especially for small and medium-sized businesses which will be the hardest hit. The basics, of course – stick to budget, monitor business closely, keep collection coming in, and tighten financial control.

Others would be wrongly cutting costs by way of reducing employee incentives. I believe, on the contrary, that we must encourage pay for performance incentives.

At Best World, our strategy is two-pronged: to continue to grow company sales and to optimise employee productivity. I believe that even in bad times, we must reward people as long as they are clearly able to contribute better performance to grow the company bottom line.

This year, we have restructured our company bonus system by basing it on company profit instead of gross sales. I see this as a win-win situation, a mutually beneficial manner of giving everyone a stake in the growth and viability of the business during these critical times.

- Dora Hoan

Group CEO

Best World International Ltd

VISIONARY business leaders are already using technology to enhance sales growth, drive incremental efficiencies and deliver excellent customer service. In challenging economic times, companies must keep their eyes on the horizon while smartly managing short-term turbulence.

For example, EMC is helping companies of various sizes invest in IT infrastructure solutions that squeeze more value from flat IT budgets. Reducing the physical space needed for IT infrastructure, as well as lowering the power and cooling costs to support the infrastructure, becomes even more important in tightening economic times.

In a slowdown, it is also important – although not easy – to remain focused on product and service innovation. As a company, EMC will spend more on R&D than ever before to ensure we bring new innovation to our customers globally.

Having seen Singapore’s economic indicators, and the recent Budget, I am confident that the country as a whole, and the local and multinational companies based here, are well positioned to deal with any changes to the world economy.

- Steve Leonard

Senior Vice-President, EMC Corporation; and President, EMC Asia Pacific/Japan

EMC Corporation

THE US is in recession and I suspect this one will be protracted and will impact the rest of the world. Emerio is an IT outsourcing company with an emphasis on support and consequently, we expect our business to grow faster as US companies will need to do even more with less!

As far as the Singapore economy is concerned, there would be a short-term impact but I am confident that with Singapore’s ability to re-invent itself, we will be able to counter it and emerge stronger. A focus on Asia – not just China and India but also the rest of Asia – should see us sailing through this period.

- Harish Nim

CEO

Emerio Corporation Pte Ltd

See downturn as opportunity

THERE is too much attention paid to whether ‘an economy’ is in recession. My view is that different sectors have remarkably different dynamics which argue against a generalised view. For example, it is fairly clear that financial services, construction and probably the durable goods sector in the US are ‘in recession’.

However, agriculture, aerospace and international tourism are booming. I have been surprised at the strength of the recent retail numbers. At any point, some sectors are likely to be in recession and others booming. Asia is no different.

A lot of attention has been paid to whether or not the Asian economies and the US economy are decoupled. I’ve seen little high-quality data associated with this debate; analysts seem to quote data showing the declining percentage of exports from Asia going to the US. This is a fairly shallow understanding of decoupling.

Second, the level of coupling will, of course, vary significantly by sector. For example, I have been surprised by the extent that Chinese and Singapore-based banks have taken write-offs on the US sub-prime products – which just goes to show that ‘coupling’ can occur in mysterious ways.

I believe a number of key sectors in the US will go through a fairly deep recession. The US is a more flexible and responsive economy than most OECD economies, and will therefore restructure and recover more quickly then other countries such as Japan, Germany and France. This is one of the great strengths of the country.

The nature of most Asian companies is that they would rather lose money then downsize, though this is a generalisation. If Asian companies find markets in the US are being crimped, they will aggressively pursue other markets. A Chinese toy manufacturer will not undertake layoffs because of a US slowdown. They will ask: Where else can I sell these toys?

As a result, whether Asia is currently decoupled from the US, at the end of this down-cycle Asia will be more decoupled from it than before. But it won’t happen automatically or smoothly; Korea and India are simply not going to accept Chinese toys as easily as the US. The optimistic case is that these frictions result in new resolve for the World Trade Organization and consistent global trading rules. Of course, there are pessimistic cases.

For companies, there is the classic advice: Cut costs and find new sources of revenues. I’m a consultant – of course I would say this! Just as important is to have a clear sense of history – who were the winners and losers in your sector in the last downturn? What did they do to gain share and maintain their financial performance?

The worst thing you can do is just hunker down and wait for the next upturn. Get your management together and figure out how to convert the downturn into an opportunity. If you don’t have some great ideas – hire a consultant!

- Charles M Ormiston

Director

Bain & Company

IT IS widely misunderstood that a slowdown or a recession will affect every company that is doing business with the US. This may not be the case as there are some recession-proof industries. I consider the aftermarket tyre industry to be such an industry. A slowdown in the auto industry affects the sales of new vehicles – but existing vehicles still need tyres to ply on. Within the tyre industry, the major brands may feel more heat than the budget brands. There is a tendency to shift from an expensive branded product to a non-branded economical product in such an environment.

I have seen a surge in business recently which strengthens my belief that the market is shifting its purchasing pattern. As such, I do not think that the companies operating in the ‘budget brand’ category in the after-market auto industry will be affected. In fact, this is the time to go after business which was not accessible in the past. Now is the time that customers are actually looking for value.

As a precaution, however, it is imperative that businesses start spreading their chips into other markets and protect their existing business by investing in business/credit insurance, which will cover them adequately in case of any default.

- GS Sareen

President and CEO

Omni United (S) Pte Ltd

MY ASSESSMENT is that a US slowdown will have a material impact on Singapore only if it is prolonged and severe. This is due to our sound economic fundamentals, diversification of our economy away from manufacturing and electronics, as well as our location in a high-growth region with a large middle-class market and educated workforce.

In times of market volatility, we foresee growth opportunities over the next few years given large foreign investment flows into the region, booming regional economies that contribute to rising mass affluence, as well as higher demand for wealth planning from fast-ageing societies.

As an Asian specialist, the DBS Group is well-placed to seize these opportunities because of our experience and sound understanding of the regional markets.

Businesses caught in the slowdown can look into ways to better manage their costs, explore other potential avenues for growth, possibly in new untapped markets, consider flexible work arrangements and raising staff productivity.

- Deborah Ho

CEO

DBS Asset Management

AS THE world’s third-largest IT services provider, Fujitsu Asia provides solutions for customers in the Asean markets of Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam – but not the US. Therefore, as long as the IT demand in our target markets remains healthy, we needn’t fear that a US slowdown or recession will impact us negatively.

The Singapore economy in general should also continue to do well because we are not as dependent on the US economy as compared to, say, five years ago.

Most indicators suggest that the IT demand will remain very strong this year. For example, a recent Gartner survey of about 1,500 chief information officers (CIOs) worldwide revealed that IT expenditure is expected to surge by about 8.3 per cent in Asia this year – far outstripping the 3.3 per cent rise in the global average.

The report also identified that in 2008, the focus areas among Asian CIOs include IT infrastructure, application rollouts and other areas. The implication here is that, despite the possibility of a US slowdown or recession, Asian companies are still prepared to invest in technology to prepare themselves for future business growth.

This makes sense because it can take months or even years for an IT investment to progress from conceptualisation to rollout.

Hence, companies that delay making vital investments during a downturn could be unknowingly disadvantaging themselves when things are back on the upswing. After all, without added headroom – which IT investments can provide – for scaled-up operations, companies might be unable to capitalise on the business opportunities that an economic recovery presents.

I always believe that adversity and opportunity exist togther. A slowdown in the US may pose some challenges, but it indirectly provides an impetus for companies to prepare themselves for future growth, which is merely a matter of time. And leading IT companies like Fujitsu Asia can help companies with such preparation efforts.

- Noboru Oi

Group CEO

Fujitsu Asia Pte Ltd

WITH the US being the world’s largest economy, economists and analysts have said that any signs of slowdown could impact everyone, especially those economies or industries highly dependent on the US. Some have warned that the effects of a drop in consumer spending could impact the Asian electronics manufacturers.

That said, we see resilience in the global economies. Where there are challenges, we also see some opportunities. All the more, businesses need to focus on creating value for their customers to maintain their competitive edge and strengthen their position in the industry.

For Excelpoint, we believe that it is critical to focus on executing well to strategy, maintain a strong cash position to capture opportunities, and be prepared to make adjustments where necessary to mitigate any risks. We will continue to invest in emerging markets where our customers have ventured into, and collaborate with them and our global partners to capitalise on opportunities in those markets.

Important, too, is the continued emphasis on innovation. We want to be able to research and develop new applications and technologies with the aim to offer our customers a wider range of solutions. This will help us emerge as winners in the industry in the long run.

- Albert Phuay

Chairman and Group CEO

Excelpoint Technology Ltd

WHILE we believe that a potentially bearish US economy will have a global impact on  Organisations and markets, this is an opportunity for many companies to take a hard look at how their operations can be optimised for efficiencies and how new businesses can be gained by looking beyond traditional means of getting to their customers and the marketplace.

There is a growing trend where deploying innovative technologies such as virtualisation and open source are helping businesses achieve these goals by optimising how information technology is supporting their existing business. Increasingly, businesses are also looking at more cost-effective and efficient channels to get to the business partners, customers and the marketplace by making information technology supplement their existing route to market.

We are confident that this is one way that businesses can save money and grow their businesses and give them a better chance of weathering not just this slowdown but any slowdown.

- Ong Chee Beng

Managing Director, Singapore

Sun Microsystems

IT IS still premature at this point to predict the extent of the US slowdown and to project how it will affect the Asia Pacific, and Singapore. However, with globalisation and lessons learnt from the Asian crisis, countries like Singapore are now more hedged against fluctuations from the US economy with greater investments in fast-growing markets like China and India.

I believe when one door closes, another window opens. In times of cyclical downturns, it is the onus of business leaders to proactively seek new opportunities (perhaps investing in emerging markets in the Asean region) to diversify risks and chart future growth. Many companies like us would have laid the groundwork in recent years, coupled with a long-term strategy, enabling us to ride out cyclical downturns, resulting in business continuity and growth prospects for the future.

- Bryan Low

Vice-President and Managing Director

AMD South Asia

A US downturn will almost certainly have a negative impact on Singapore’s economy, and it is unlikely that the childcare industry will be spared. At Cherie Hearts, for instance, we expect that a number of parents could look to alternative childcare options, such as home-based care by grandparents.

The best course of action that businesses can take in the face of an economic slowdown is to invest in training and development, as well as R&D. This will be our best bet in preparing ourselves to ride the economic growth once the dark clouds blow by. Cherie Hearts, for one, will be stepping up efforts on staff training, as well as curriculum research and development.

- Sam Yap SG

Group Executive Chairman

Cherie Hearts Group Int’l Pte Ltd

S’pore will be insulated by Asia

A RECENT study by technology research house Gartner shows that despite the US slowdown, Asian firms still plan to increase their annual IT budgets by about 8.3 per cent in 2008.

I believe that companies’ priority this year will be on technologies that directly improve their business performance. CA will continue to create and refine software that can help firms simplify and unify their IT operations, and which deliver tangible business value.

With regard to Singapore, the projected growth in Asia’s emerging economies should insulate us somewhat from the US slowdown, although many firms will still come under pressure to control costs.

This means that organisations should work on better tapping into their current resources. Besides using technology to streamline their operations, they should look harder at integrating technology with their people and processes. Best practices and consultancy services to achieve this are readily available, and businesses should proactively check them out.

- Brenton Smith

Managing Director and Area Manager, Asia South

CA

THE slowdown in the US may dampen business confidence and hurt our export-led economy but we will more likely be impacted by rising inflation and rapidly increasing business costs.

Many businesses are linked to regional and global customers, thus removing our reliance on just one country for trade. We are moving into Middle Eastern economies. We already have strong business links with the Chinese and Indian markets and these should help cushion the impact of the US slowdown. However, what seems to be at the forefront of many companies’ concerns is the more pressing problem of rising wages and a shortage of talent.

- Dhirendra Shantilal

Senior Vice-President, Asia Pacific

Kelly Services

FROM a geographical perspective, companies need to anticipate an economic slowdown in the US and switch activities and priorities towards growth regions like Asia. In Asia, because of the integration of global markets, developing countries will also be impacted, but this will be overshadowed by the domestic drive that we are seeing in countries such as China, India, and Southeast Asia.

Regarding the IT industry, there is no doubt that it will be impacted too. According to a recent IDC report, global technology spending will experience slower growth next year because of the current uncertain economic climate. Therefore, IT vendors and service providers must also stay ahead of the game by being flexible and making sure they adapt to these changes.

Last year, Serena Software moved to a software-as-a-service model and this is paying dividends for us now. In this environment of economic uncertainty, it is natural for companies to hold back on their capital investments to mitigate their risks. Therefore, the ability to adopt on-demand services on a pay-as-you-go basis is a perfect sourcing strategy for businesses seeking greater cost controls and flexibility during tough times.

- KC Yee

Vice-President, Asia Pacific

Serena Software

WHEN the world’s largest economy goes into a recession, most industries will be affected one way or another. Businesses need to understand that and start taking steps to balance the risks of a slowdown in the US. Businesses should look beyond the US market to cushion the downturn, if any.

Asia presents itself as an excellent opportunity for business growth.

Businesses can start by diversifying their clientele to reduce the risk of relying on a particular industry.

Riverstone, for example, is maintaining its lead in Asia for high-tech cleanroom gloves by expanding our clientele beyond the major players of hard disk drives and semiconductors.

For now, the demand for the high-tech clean-room consumables continues to grow and Riverstone intends to ride this trend.

- Wong Teek Son

Executive Chairman and CEO

Riverstone Holdings Ltd

AT AT&T, we are focusing on the strong growth engines in Asia Pacific – like China and India, but also the emerging markets in South-east Asia – and plan to continue investing in our business here to mitigate effects of a possible slowdown of the US economy.

Macro-economic data, ranging from the UN to the World Bank, shows that growth in Asia Pacific should be expected to continue, though maybe at a slightly lower rate than in the previous extraordinary years. Asia-Pacific economies are considered to be quite well-prepared to manage the continued uncertainty in the external environment coming from the US and, for example, the oil markets.

With our region continuing to be the fastest-growing region globally, a focus on such overseas opportunities can help minimise a potential dip in the US economic growth. Therefore, I would expect a continuous commitment to this region from global MNCs like AT&T. Most likely, we will see the further creation of high level jobs, continuous investments and more and more products and services being developed and managed in and out of the Asia Pacific – for a growing number of customers in this region.

- Collis Loh

Country General Manager

AT&T Business, Singapore

A US slowdown or recession will have some, but not catastrophic impact on the Singapore economy, as a growing driver of Asia’s growth has been fuelled intra-region. Thus, while the US curtails its consumption demand, this will be counter-balanced by the continued rise of Asian consumption – whether in China, India, or even Vietnam.

Having said that, in the event of a slowdown, having the right people to work and manage your business is critical to weathering a tough economic environment. The companies who emerge winners will be those that are focused on measuring and improving productivity, including that of their workforce.

- Su-Yen Wong

Managing Director, Asean

Mercer (Singapore) Pte Ltd

Be ready for tough times

TECHNOLOGY spending is normally a lagging indicator of an up or down-market. Our order book and sales pipeline currently look very strong. If we are to see slowing tech spending it will most likely hit Asia three to four months from now. So far, US multinationals, even in the financial services sector, are keeping up their spending with projects still being executed. Only one major client that I have met recently has talked of deferring a project. Companies obviously need to have a Plan B ready for any slowdown in spending. It’s important to be ready with scenarios so that we can adjust our model as any changes unfold.

- Bill Padfield

CEO

Datacraft Asia

THE US will continue to be the leading global economy for many more years. However, the print, publishing and media-related industry as a whole, my organisation included, has also diversified, doing a substantial amount of business with Britain, the Middle East and the EU countries.

On a national basis, the US is one of our main trading partners. Consequently, a US slowdown or recession would, together with many other Asian countries, definitely affect us negatively. Gloomy markets, recovery and growth are all part of the economic system.

Singapore businesses can reduce this looming negative impact by aggressively diversifying investments and export makets – which we have already done to a considerable extent.

With prudence and foresight, our businessmen could further move into Russia, the Middle East, the Korean peninsula and other Asian countries, Latin America and Africa.

Singapore businesses – especially our cash-rich investors and exporters, be they in mindshare leadership, providing services or manufactured products – should reduce over-dependence on the US.

- R Theyvendran

Chairman / Managing Director

Stamford Media International Group

A US slowdown or recession will have a negative impact on the global economy. US consumption has been instrumental in helping to boost world economies for several years. The growth of China and India is not going to be able to make up for the shortfall in US consumption in the event of a major cutback in spending in the US.

In a similar vein, manufacturers in Singapore will be negatively affected by the US slowdown as their products are mostly exported overseas. CEOs need to understand that it is no longer business as usual. Fortunately for my company, we will be able to comfortably ride out the tough times as we are a multinational company that has recognised the need to change much earlier.

For those businesses which are financially weak, it is important to restructure quickly to face the new harsh realities. They have to review their cost structure to ensure that they remain cost-competitive.

Companies need to penetrate markets such as the Middle East, China and India, whose economies are still booming. However, for weak companies, it is better to be healthy before expanding overseas, or their limited resources will be further dissipated. They should get their act together in Singapore first, such as putting in place a strong and competent management team and getting a positive cash flow. There are opportunities in the recession too as many weaker competitors will be knocked out of the race.

- Teng Yeow Heng Michael

Managing Director

TR Formac Pte Ltd

A US recession will cause uncertainties and undulations across the globe, but economic giants like China and India can cushion some of that ripple effect. As expounded by Minister Mentor Lee Kuan Yew, increased domestic consumption and investments in infrastructure, which serve to sustain a robust financial core, can also help weather the economic storm.

Local businesses, particularly SMEs, must be ever-ready for unforeseen events and have contingency plans in place during a period of decline. These include cost-cutting measures like downsizing and reducing overheads as well as increasing savings and investing in short-term assets that can be liquidated in times of need.

- T Chandroo

Chairman and CEO

Modern Montessori International

Singapore may be hit

THERE is no doubt that any slowdown or recession in the US economy will have a direct impact on the Singapore economy. Although Minister Mentor Lee Kuan Yew has stated that Singapore will not be too badly affected should the US catch a cold, prevention is better than cure.

As electronics is an important sector that exports to the US market, any contraction in the US will have immediate effect on this major industry which contributes a large percentage of the manufacturing exports. To mitigate any drastic drop in exports, IE Singapore should support our manufacturers in aggressively sourcing new emerging markets in the Middle East, South Asia and North-east Asia. A better option would be to shift the bases of production closer to the markets.

Pakistan has been identified as a pivotal centre for electronics serving the Middle East and South Asia, while North Korea is also a focal centre serving Greater China and East Asia.

It is timely for the Singapore Business Federation to organise missions to these key centres to explore, exploit and extract the opportunities for exports, investments and R&D, etc. I am confident that the electronics sector would be nimble enough to ride out any economic setback in the US. Let’s pull ahead.

- Derek Goh

Executive Chairman / Group CEO

Serial System Ltd

I BELIEVE the signs indicate that the US is in a recession or on the verge of one – with consumption going down, interest rates being reduced, and the implementation of a US$152 billion package to stimulate the economy.

In such a scenario, I would suggest that Singapore businesses take a conservative approach by containing costs, ensuring that forecasts are conservative and watch inventories. When there are opportunities to monetise assets, I would proceed, as cash is king in this situation.

Until India and China dominate the world economy, I believe that whatever happens in the US will have an adverse impact on Asia and Singapore, although this will be less than before. Singapore has taken enough precautions to fend off any cold the US might suffer, but again it depends on how badly the US will be affected, as the financial crisis continues to unfold.

- Lim Soon Hock

Managing Director

Plan-B Icag Pte Ltd

THE sub-prime mortgage crisis has now ballooned into a deepening credit crunch, leading to less liquidity for a host of financial assets and structures. Although the US Federal Reserve has reduced interest rates in recent months, there is still a crisis of confidence in the US which mirrors the experience in Asia during the 1997 financial turmoil.

Clearly, the US is already in recession. Its extent and duration will depend on how long it takes for confidence to be restored. And the signs are not good because it seems that investors, banks and markets are getting more – and not less – jittery with each passing week. The impact of the US recession on Asia may be limited if it lasts six to nine months. However, Asian economies – even Japan, China or India – are probably not strong enough to weather a prolonged economic depression in the US.

As a privately-owned bank, Rabobank is taking steps to strike a balance between supporting our long-term customers, and preparing for a possible slowdown in this part of the world. On the one hand, as a financial cooperative, we must do our best to ensure that the funding needs of our customers are met. On the other hand, as a bank with a Triple A credit rating, we must maintain prudent lending policies, exercise due diligence and read market warning signs early and accurately.

Every cloud has a silver lining, so a widespread recession could perhaps moderate the worldwide trend of rising inflation, which is caused by escalating prices of commodities, labour and land.

If Singapore enters a recession, hopefully workers will realise that wage increases cannot outpace productivity gains indefinitely without companies losing competitiveness – which may ultimately lead to employees losing their jobs.

- Goh Chong Theng

General Manager, Singapore

Rabobank International

ANY US slowdown will impact businesses here. Everyone’s hope is that it will not be a contagion with business confidence being dragged down. The flipside is that the costs of US goods and services will be lower with a weaker dollar for those who do business with the US. This sliver of opportunity should enable us to offer more attractive and competitive goods and services.

On the other hand, people are hoping that the boom in China, the Middle East and elsewhere will provide a counter-balance. Like many Singapore companies, we stand our business on many legs in different countries. We hope to re-adjust our balance even as one part of the business is down.

Indeed, it may ironically be the balance we need with the current inflation and a resource crunch.

But more worrying is the way events might turn out. The great uncertainty and turbulence might catch many businesses wrong-footed. We all need to be vigilant.

- Liu Chunlin

CEO

K&C Protective Technologies Pte Ltd

A RISING tide lifts all boats, but unfortunately, the inverse is true as well when it comes to a US recession. Asia is not decoupled from the US or any other world economy and this should come as no surprise. Access and dependency go in lock-step and capital markets are extremely efficient at providing access to virtually any market segment in any economy – the sub-prime market, for example.

Diversification is the key and where countries are not efficient at achieving balance our firms must be.

An organisation’s best hedge is a global revenue stream, a balanced product set, and access to a wide range of market sectors.

- Mark Bashrum

Regional Vice-President, Asia

ESI International

DESPITE the slowdown in the US, Singapore’s financial and construction services clearly remain the bright spots, fuelling a soft-decoupling story for Singapore from the US economy. Still, with rising inflation and a negative real interest rate environment, private banking, like other businesses, cannot completely ignore the US downturn.

Investors, regardless of their wealth bracket, behave differently in this climate. Private banking clients tend to lower their risk appetite, gravitating towards conservative products with lower yields and margins. However, my private bankers must also be able to give clients the confidence to look beyond the downturn, instead of focusing on the storm clouds. It’s essential that we take a fresh look at our clients’ changing situation or new environment. Then we make sure our products and services adapt to help clients navigate the storm and come out on top.

- Barend Janssens

Head

ABN Amro Private Banking, Asia

THE US is a major consumer of goods and services which are manufactured all over the world. In the case of electronic goods, consumer demand will fall. Singapore, as a manufacturing site for such products, will be affected. Both facility and equipment utilisation will consequently be impacted.

Following from this, there is likely to be a reduction in labour and overhead costs by businesses to keep costs low and ride through the storm.

There is no miracle solution to overcoming recession as it is part of the business cycle. During a recession, businesses have to be prudent and keep a tight control over costs. We also have to explore other markets such as China and India to sell our goods but this does not happen overnight.

The government can provide support in terms of incentives, rental reductions, property tax adjustments, energy rate cuts and other such measures which will help companies through the turbulent period.

- EH Lim

CEO

Avi-Tech Electronics

IN MY view, the US will definitely suffer a recession this year due to the sub-prime problems and this will cause a global economic meltdown. Stock markets worldwide will decline by not less than US$7 trillion. The US consumes 25 per cent of the world’s products so a recession there will affect the world’s economies. Even Singapore’s growth this year is likely to be less than 4 per cent because of it.

The travel and tour industry will also slow down. Luckily, Singapore is a debt-free country; its dollar may well be equal to the greenback at some point.

SA Tours will promote travel to the US, for enjoyment as well as to build relationships to do business there. Singapore is a marketing hub and Singaporeans can market products produced in the US throughout Asean. A recession in the US may well be an opportunity for Singaporean businessmen to do business with Americans.

- Ng Kong Yeam

Group Executive Chairman

Sino-America Tours Corporation Pte Ltd

Others

A US recession would have varying degrees of impact on multinational organisations in Singapore, as well as the local economy, given that Singapore is a major trading partner of the US. However, as for the IT industry, we don’t foresee a huge negative impact in our region as economies like Singapore are still experiencing buoyant growth and companies are investing in technology solutions to provide them competitive advantages.

In fact, we believe that a critical aspect to managing such potential risks for organisations is to have access to accurate and timely information and business intelligence tools that facilitate quick and effective decision-making.

- VR Srivatsan

Vice-President, South Asia

Business Objects

CREDIT crunch, downturn, or recession, the coming year is going to be a challenge for the global economy – and the IT industry will face the same pressures. While there’s no doubt that tighter belts will mean IT departments paying close attention to IT vendors and service providers performance, it will not be simply the case of the thumb-screws coming out.

In our case, even amid economic uncertainty last year, Interwoven’s fourth quarter and full-year performance was the highest we have ever recorded. During an economic slowdown, we can see an increase in online marketing budgets – more cost effective than traditional marketing methods. So while the spend from IT may reduce in a slowdown, we expect to have access to a larger portion of the marketing budget. The tougher times are, the more important it is for companies to measure and make the most value out of their budgets.

We anticipate that other IT vendors and service providers will also find a niche to prosper during these times of economic uncertainty. Companies are realising that business efficiency can be improved by innovating aspects of their business using IT.

- Sanjay Aurora

Vice-President of Asia Pacific

Interwoven

Source: Business Times 3 Mar 08

(NEW YORK) US Federal Reserve chairman Ben Bernanke didn’t utter the word, but analysts reading between the lines of his testimony to the US Congress this week say that he came as close as a central bank chief can to acknowledging the chances of recession.

Since the start of the global credit squeeze in mid-2007, the Fed has been cautious about suggesting US economic and financial conditions could get worse, in part for fear that markets might overreact.

Yet speaking before Congress on Thursday, the Fed chairman held true to his vow for greater transparency, predicting that economic growth, which slowed sharply in the fourth quarter of 2007, would not return to normal levels until at least 2010.

‘While the National Bureau of Economic Research (NBER) has yet to decide whether the US economy is in recession, Mr Bernanke’s replies have all but confirmed the economy is already in recession,’ said Ashraf Laidi, chief foreign exchange strategist at CMC Markets US in New York.

The NBER is considered the official arbiter of US recessions, but their calls tend to lag the actual start of a contractionary period by about three to six months.

Not only did Mr Bernanke offer a glum outlook for growth complicated by rising inflation, he also indicated that even his already depressed forecasts might be overly optimistic.

‘The risks to this outlook remain to the downside,’ Mr Bernanke said. ‘The risks include the possibilities that the housing market or labour market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.’

It is not difficult to see how some observers might interpret strong words as these from a measured man like Mr Bernanke as a sign of real concern.

‘If you acknowledge a recession it’s your fault, so that’s one reason not to be the first to do it,’ said Alan Skrainka, chief market strategist at Edward Jones, in St Louis, Missouri.

The threat of a prolonged recession is not negligible. What started as a US housing market slump has since spread through the financial system like a wildfire, beginning with assets directly linked to sub-prime mortgages and then extending to bonds formerly deemed safe as mistrust in the banking sector soared to new heights.

Mr Bernanke also attempted to rein in inflation expectations by saying the central bank would remain vigilant on price pressures which have become more apparent after both producer and consumer inflation jumped in data released this month.

These developments not only complicated the Fed’s task of regulating the monetary lever, but could also paradoxically worsen the economic situation. Since any possible recession is expected to be driven by a retrenchment in consumer spending, further damage to purchasing power from rising costs could force a downward spiral.

The economy is not close to a 1970s-style mix of stagnant growth and high inflation, Mr Bernanke told the Senate banking committee, but he painted a generally dour outlook and cautioned that the downturn is likely to cause some small banks to go under.

‘I don’t anticipate stagflation,’ he said.

Some analysts have become increasingly worried about that possibility after recent high readings on inflation and weak readings on growth.

‘I don’t think we’re anywhere near the situation that prevailed in the 1970s,’ he said.

Source: Reuters, LAT-WP (Business Times 1 Mar 08)

WASHINGTON – UNITED States Federal Reserve chairman Ben Bernanke’s readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.

‘Mr Bernanke has really overweighted the economic risks relative to inflation,’ said Mr John Silvia, chief economist at Wachovia, following the Fed chief’s second and final day of testimony to Congress on Thursday.

‘He may get some disagreement’ among colleagues on the Federal Open Market Committee, Mr Silvia said.

Investors’ expectations for inflation over the next 10 years jumped to the highest since last June after Mr Bernanke said the US central bank will act in a ‘timely manner’ to combat ‘downside risks’ to growth – a signal to investors that the Fed will again cut interest rates.

The hope is that lower interest rates will encourage consumers and businesses to spend more, while the risk is that the weaker US dollar that will result from lower rates will cause prices of goods and services to be adjusted upwards. A falling US dollar has also seen investors put more of their money into commodities, driving up the prices of oil, metals and food.

Fears have grown that the US could come under the grip of stagflation, when stagnant growth is combined with rising inflation, for the first time in decades.

Mr Bernanke rejected the notion.

‘I don’t anticipate stagflation,’ he told lawmakers. ‘I don’t think we’re anywhere near the situation that prevailed in the 1970s.’

Mr Bernanke added that he expects inflation to calm down, in part because of sluggish economic growth and rising unemployment.

For now, he said, the biggest risk is the weakening economy.

Traders now see a 100 per cent chance that the Fed will lower its target rate for overnight loans between banks by at least a halfpoint, to 2.5 per cent at its next meeting on March 18.

Mr Bernanke acknowledged that with oil prices hitting all- time highs and food prices rising, the Fed was ‘in a difficult situation’.

‘While we can’t do much about oil prices or food prices in the short run, we do have to be careful to make sure that those prices do not either feed substantially into other types of prices,’ he said, adding that the Fed must ensure that the public stays ‘confident’ that it will control inflation.

Consumer prices last year surged 4.1 per cent, the most in 17 years, while wholesale prices were up 7.1 per cent, the biggest 12-month increase since 1981.

And consumers are expecting prices to keep on rising. Households’ estimate of price increases one year ahead reached 3.7 per cent last month, the highest since August 2006, according to a poll by the University of Michigan.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 1 Mar 08)

That is going to worsen the sticker shock for Americans headed overseas or buying some of their favourite imported goods.

But it also will underpin the current boom in US exports, which has helped offset some of the economic pain of the housing bust – at the expense of Asian and European exporters.

The dollar hovered near a record low against the euro at US$1.511 in Tokyo trading yesterday, just off a record of US$1.5144 struck on Wednesday.

Six years ago, one euro could fetch less than 87 US cents.

The dollar also fell to its lowest level in years against the Singapore dollar, Australian dollar, Swiss franc, Brazilian real, Russian rouble and a number of other currencies.

The latest plunge in the greenback’s value followed Fed chairman Ben Bernanke’s testimony on Capitol Hill on Wednesday, where he described the economy as ‘distinctly less favourable’.

He also made it clear that the US central bank was more worried about risks to growth than inflation.

He all but assured Congress that the central bank would continue to cut short- term interest rates.

To currency traders worldwide, that was a signal to dump the dollar again, deepening what has been a losing trend for the greenback since 2001.

Generally, the weaker a country’s economy is and the lower its interest rates, the weaker its currency gets as some global investors opt to take their money elsewhere – in the process selling one currency to buy another.

Wall Street is now convinced that the Fed will slash its benchmark rate by 50 basis points to 2.5 per cent from 3 per cent – a bigger cut than previously expected – when the central bank’s policymakers meet on March 18.

By contrast, the European Central Bank has held its key rate at 4 per cent since last June and shows no sign of wanting to join the Fed in easing credit. Higher European rates support the euro’s value at the dollar’s expense.

Source: LOS ANGELES TIMES (The Straits Times 29 Feb 08)

The Commerce Department reported yesterday that new orders dropped by 5.3 per cent last month, reflecting declines across a wide swath of industry from commercial aircraft and cars to heavy machinery and computers as manufacturers got caught in the weakness engulfing the rest of the economy.

The worse-than-expected decline was the latest in a string of reports indicating that the economy, battered by a prolonged slump in housing, a serious credit squeeze and soaring energy prices, is in danger of toppling into a recession.

‘The economic situation has become distinctly less favourable’ since the summer, the Fed chief told the House Financial Services Committee in his semiannual economic report to Congress.

Since Mr Bernanke’s last such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Mr Bernanke said that the confluence of these factors has turned people and businesses alike to adopt a more cautious attitude towards spending and investment. This, he said, has further weakened the economy.

Incoming barometers continue to ‘suggest sluggish economic activity in the near term’, Mr Bernanke told the House Financial Services Committee. At the same time, he added, the Fed must keep a close eye on inflation given the recent runup in energy and other prices paid by consumers and businesses.

For now, though, the No. 1 battle is shoring up the economy.

Mr Bernanke pledged anew to slice a key interest rate to help the wobbly economy, which many fear is on the verge of a recession – or possibly has already toppled into one.

The Fed ‘will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks’, Mr Bernanke said, hewing closely to assurances he offered earlier this month A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a US$168 billion economic stimulus package passed by Congress earlier this month.

Source: AP, AFP, Reuters (Business Times 28 Feb 08)

WASHINGTON – EVEN if Federal Reserve chairman Ben Bernanke, United States President George W. Bush and the US Congress win the battle to avert a recession in the US this year, they risk losing the war to strengthen the economy for the long term.

US economic growth will get a boost in the second half of this year, as consumers spend some of the US$107 billion (S$150.6 billion) in tax rebates passed by Congress and signed by Mr Bush this month.

The US may suffer a letdown afterward, as the kick from the stimulus wears off, leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth.

‘This is not a one- or two-quarter phenomenon,’ says economist Neal Soss of Credit Suisse. ‘This is not a V-shaped event. It’s a slowgrowth scenario.’

Fed officials see growth picking up to more than 2 per cent next year, as inflation ebbs to 2 per cent or below.

Mr Bernanke is slated to discuss the central bank’s forecast in a testimony to Congress tomorrow and on Thursday.

So far, the Fed’s deepest interest rate cuts since 2001 have not helped the financial markets or the economy. What they have caused is an increase in inflation expectations, with the price of gold soaring to a record US$958.40 an ounce last week.

What is more, say economists Soss and Ethan Harris of Lehman Brothers, policymakers face structural changes in the economy that are not so susceptible to the traditional tools of interest-rate and tax cuts.

As a result, Mr Soss sees the economy expanding just 1.3 per cent this year and about 1.5 per cent next year.

Mr Harris is even more pessimistic. He sees growth easing to 0.9 per cent next year from 1.1 per cent this year and 2.5 per cent last year.

Fed officials acknowledged in the minutes of their last meeting on Jan 29 and 30 that they were having trouble getting ahead of the credit squeeze in financial markets.

The financial industry is curtailing credit and conserving capital after a decade-long boom in profits went bust in the third quarter.

Following mounting losses on past loans, banks have already taken write-offs of US$163 billion since the beginning of last year.

A Fed survey released on Feb 4 found that banks had become stingier in granting credit during the previous three months.

Fed officials say they expect that to continue, making it harder for the central bank to stimulate the economy through lower borrowing costs.

‘The Fed can give liquidity to the markets, but the Fed cannot do much if the markets are afraid of solvency risks,’ said Mr Robert McTeer, a former Dallas Fed president.

Consumers, until now the driving force behind the expansion, are feeling the squeeze. While households will get a short-term boost from the coming tax rebates, their longer-run finances look shakier.

Households reduced their savings rate to virtually nil in December from close to 10 per cent of disposable income 15 years earlier.

That trend may reverse as credit becomes scarcer and home prices fall.

Mr Allen Sinai, chief economist at Decision Economics, calls the pullback by consumers ‘a seismic shift’.

‘For several years, the growth of consumer spending is going to be significantly below its long-run average of 3.5 per cent,’ he said.

Consumers have also been pinched by the rising cost of food, fuel and other necessities.

Inflation, as measured by the personal consumption price index, clocked in at a 3.5 per cent year- over-year rate in December, the highest for that month since 1990.

Behind the heightened inflation concerns: slowing productivity growth, making it harder for companies to recoup higher costs through increased efficiency.

Professor Robert Gordon, of Northwestern University, says the surge in productivity that began around 1995 was a one-time event sparked by the advent of the Internet.

Nobel laureate Edmund Phelps says there is little the Fed can do when faced with such a structural change.

‘We’ve had a series of booms, and it seems to me they are now over,’ says Mr Phelps, an economics professor at Columbia University.

‘As a result, we’re going to see a period of slower growth than in the past.’

BLOOMBERG NEWS (Source: The Straits Times 26 Mar 08)

More pain can be expected as both borrowers with poor credit, who hold sub-prime mortgages, and borrowers with good credit, who hold Alt-A mortgages, see their interest rates reset, Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks for a speech in California’s Silicon Valley.

The Alt-A loan is generally made to borrowers who have good, but less than perfect credit histories and may involve less documentation of income and assets.

Ms Bair, who has been pushing banks and loan servicers to modify home loans, said new rules are needed to protect all homeowners and end compensation plans for brokers who steer borrowers into unaffordable mortgages.

About 85 per cent of borrowers with payment-option loans, one type of Alt-A mortgage, now owe more than they did at the time of origination, she said. About 75 per cent are making the minimum payment.

‘The problems associated with these products are already evident,’ Ms Bair said. ‘We’re seeing a rash of ‘first-year defaults’ among Alt-A loans to speculators and borrowers who should never have been qualified for the loan in the first place.’

Ms Bair has warned that a wave of loan problems involving prime borrowers looms next year because about US$600 billion of nontraditional mortgages were issued to prime borrowers in recent years.

Non traditional mortgages flourished after 2003, thanks to easy credit and double-digit home price increases in some markets.

Ms Bair and other banking regulators say one of the causes of the sub-prime mortgage mess stems from non-bank lenders that flew under regulatory radar while criteria to get a loan were lowered.

She also said a recent proposal by the US Federal Reserve Bank to amend the Truth-In-Lending rules, which apply to advertising and disclosure of interest rates and terms, are an important first step forward.

‘The home mortgage market needs strong rules,’ she said. ‘We need rules that apply acrossthe-board so they protect all homeowners, regardless of who their lender is, or what state they live in. We need rules that apply to banks and nonbanks alike.’

Source: REUTERS (Business Times 23 Feb 08)