What’s Important in the Financial World (2/22/2012) Recession, Oil Prices

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The Chinese and eurozone economies each showed signs of sharp slowing, and in Europe a new recession has begun. Data from the HSBC flash purchasing managers index indicated that China’s PMI continues to contract. It was 49.7 for February, the fourth month below the critical 50 level, which is the difference between expansion and contraction. In Europe, new data from Markit showed that eurozone manufacturing activity has stayed negative as well. The information is a confirmation of what the IMF and OECD said are concerns as they revised down forecasts of growth across most of the world. The only large economy that has done fairly well in the past two quarters is the U.S. American consumer and business demand cannot carry the balance of the world, though.

New Corporate Tax Rate

President Obama will suggest that the basic corporate tax rate fall to 25% from 32%. It would appear this will cut overall federal receipts from businesses, but the president means to eliminate scores of loopholes in the code. This has been tried before. Unfortunately for the future of the plan, companies will lobby for their favorite loopholes and Congress will be awash with requests to tax some sectors and not others. The code is complex enough and the politics of change are difficult enough that a major alteration is unlikely.

General Motors and PSA Peugeot Citroën

General Motors (NYSE: GM) and PSA Peugeot Citroën, each of which has struggled recently in Europe, may set a pact to jointly manufacture cars and source parts. GM’s Opel unit has lost money for three years, and many of the U.S. car company’s investors want it divested. GM management sees the operation as a strategic asset essential to keep sales in the European Union. PSA Peugeot Citroën could use scale in its home market to bring down its manufacturing costs. What the deal would do to employee levels may be the most difficult hurdle. Unions have already said they will oppose cuts at Opel, which might include shuttering of plants. Similar moves done by a joint venture will not be greeted differently.

Oil Prices Still Rising

The price of oil will not stop rising. WTI was above $105, which means the price of oil, petrochemicals, jet fuel and gasoline will continue to rise. U.S. gas prices are at all-time highs for this season of the year. A number of factors have kept up crude’s march higher. The most obvious is trouble in Iran, and the chance that the country will try to close the Strait of Hormuz, the passage way for one-fifth of the world’s oil. The regime in Nigeria is teetering. Hugo Chavez of Venezuela said his cancer has returned, which raises the question of what will happen to his 13-year old government when he is gone.

Douglas A. McIntyre

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