A combination of three negative news events helped intensify the focus on the floor of Congress to reach agreement on the $700 credit bailout plan. Stocks rose sharply during Thursday (September 25) as investors are banking on a bailout plan being finalized sooner rather than later. Partisan conflict over the final features of a plan is the hang up as both parties seem convicted that a bailout of some sort is necessary to prevent long-term recession.

Weekly jobless claims reached their highest level in seven years. This was one of the three major data reports that reinforced the perspective that a recession is building and a long-lasting economic downturn is coming with strong government intervention. Claims rose by 32,000 to 493,000 last week. This is the highest reported claims total since just after 9/11 (2001).

Durable goods also came in much lower than anticipated, another down news item. Big ticket items fell 4.5 per cent in August. This was the sharpest drop since the 4.7 per cent goods order dip in January. Falling goods orders suggests that businesses are in a holding pattern and everyone is waiting for positive signs before expanding business. The challenge this presents is that with no one willing to jump assertively into the market, the economy remains stagnant.

Finally, the latest bad news from the housing sector showed the slowest pace in new home sales growth since 1991. Analysts had expected a one per cent drop in new home sales during August. This number was more than conservative as the actual rate of new home sales as an 11.5 per cent drop.

Perhaps even more devastating news on the housing front was the continued decline in home prices. The average price of a new home fell 11.8 per cent during August to $263,900. This is the biggest one month drop in new home values ever recorded. The median price of a new home fell by 5.5 per cent to $221,900.

With participation from presidential candidates Barack O’Bama and John McCain, President Bush and other administration members worked with Congress to try to quickly hammer out details on the $700 billion bailout proposal. Bush spoke to the country Wednesday in an address aimed at communicating to the public why a bailout was necessary and what the results would be.

Investors seemed convinced a plan would become finalized Thursday as indicated by aggressive stock buying. However, various aspects of the plan’s structure and implementation are holding up an agreement. Reportedly, the Federal Reserve is awaiting a bailout agreement to follow with a surprise inter-meeting rate cut to help boost momentum in the credit market.

Some leading economic analysts have begun to express publicly expectations of a recession that will develop between the fourth quarter of this year and the first quarter of next. A true recession is two consecutive quarters of drops in gross domestic product (GDP). Some thought this might occur in early 2008, but GDP has risen modestly in the first and second quarter.

Market Recap

The Dow dropped 29 points Wednesday, with the NASDAQ and S&P up 2 and minus 2, respectively. The big news Wednesday was a national address by President Bush in the evening to explain to Americans the reason for the $700 billion credit bailout and the negative results of not taking action. The Dow gained 196 points Thursday and growing hopes for a successful bailout plan. The NASDAQ and S&P also climbed, 30 and 23 points, respectively. New home sales and factory orders fell during August. JPMorgan Chase agreed to buy Washington Mutual assets after FDIC seizure.

Neil Kokemuller
Thursday, September 25, 2008
11:04 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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