US and Europe

US continues to struggle

Monday May 14, 2012

The news out of the United States continues to be bad on all fronts. Unemployment sits at 8.1 percent (2.6m job losses in the last four months, and 851,000 in February alone). Even the usual productivity gains are absent, down 0.4 percent in the fourth quarter. And for the first time (yes, the first time) in the current downturn, the United States is in a technical recession, having suffered two consecutive quarters of shrinkage. All of which tells us the irrelevance of such word games and technicalities. House sales continue to drop (-48 percent on last January), and with interest rates at 0-0.25 percent, other measures will have to work.

President Obama’s gigantic 2010 budget deficit may be the stimulus the economy requires. But we await news of more stringent regulation of financial institutions as a prelude to the desperately needed overhaul of the US finance sector. One hopes that solutions for the short-term are accompanied by more robust long-term plans. In particular, the era of self-regulating financial markets must cease. Their risky lending has in large part put the United States (and by extension, most other western economies) in the position they find themselves in now. They had their chance, and blew it. A system involving tighter active monitoring and regulation of financial institutions is now paramount.

With the record low federal funds rate putting the country in a liquidity trap, the US economy will be relying on other types of measures to get out of the hole. These will include the stimulus package, as well as a range of open market operations currently being undertaken by the Federal Reserve. These open market measures include buying agency debt and mortgage-backed securities. These measures are aimed at restoring confidence in the housing and mortgage markets, but it remains to be seen if they are having any noticeable effect.

Indeed, new house sales are half what they were a year ago. The West Coast is worst affected, with sales in January down 60 percent compared to the year before. Least affected is the Midwest, but even there sales are down one-third.

GDP fell 1.6 percent on the previous quarter, after falling 0.1 percent to September, ushering in the technical recession. GDP is still up year on year, however, by 1.1 percent (down from 1.9 percent in the September year). The particularly frightening aspect of the year on year fall is the 6.5 percent decline in investment spending. This is likely to be a combination of the credit crunch reducing the funds available for investment projects, and a general reluctance to invest given the unhealthy state of the economy. Keeping GDP from falling even lower was a large reduction in imports. Imports were 3.4 percent year on year, and down 7.1 percent in the December quarter over the same quarter a year earlier.

 - reprinted from BERL Forecasts March 2009