29/02/2008
Whither the US economy, 2008 | Investment Week - 29th February 2008
Can the authorities forestall a US economic recession this year, or are they too late? The US remains the dominant player in the global economy, and it still applies that when the US sneezes the rest of the world catches a cold. So, it is of more than parochial interest whether the US economy can avoid a recession.
The authorities have recently upped the ante, mobilising both a monetary and a fiscal anti-recession assault. In January, an unprecedented inter-meeting 75bp cut in interest rates was followed, barely a week later, by another 50bp. That makes a cumulative cut of 225bp from the peak in September. Surely that will get things moving?
Well, yes and no. To the extent that lower rates have led to lower mortgage rates, then the pressures on the housing market have not intensified - and the housing market does remain the epicentre of the US economic woes. However, the problem is not solely a matter of price: the most recent Senior Loan Officers’ survey revealed a significant tightening in loan standards across the spectrum of borrowers, and more expensive loan terms than those on offer pre-crisis. So, despite the savage cuts in rates, the policy shift has so far failed to turn things around.
The proposed fiscal package is equally long on hope. The package only amounts to around 1% of GDP, and it is envisaged as a one-off rebate. As such, recipients are less likely to adjust their spending patterns than if there had been a permanent boost to their incomes. Indeed, a recent survey suggested that only 25% of recipients would spend the rebate. The overall impact will not be negative, but equally it seems unlikely to provide the hoped-for kick-start to the economy.
Unlike the 2001 recession, this downturn will focus on the consumer, and the housing market remains the key. The necessary corrections to that market still have a long way to run: housing starts need to be cut back a further 20%; the prevailing inventory overhang needs to be worked off and house prices need to fall further to encourage demand. The authorities can aim to provide the necessary conditions for a recovery in 2009, but there is little they can do to forestall the coming widespread economic pain.
Douglas Roberts, Senior International Economist at Standard Life Investments
This was published in Investment Week on 29th February 2008
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