January 9, 2008 | posted by Michael Baxter in US economy |

Shh, shh, this Christmas it was oh so quiet. But then, with the first working week of the year, we saw the start of another big riot.

That great Icelandic economist, Bjork, couldn’t have said it better. There was movement up and down, but by the last day of last year the Dow was just 20 points up on the score seen 10 days earlier. Then the markets blew a fuse, and then, bang, the bottom dropped out of the markets faster than a presidential campaign. It seems that so far this year, speculators have fallen out of love with the Dow, which has plummeted 675 points since the end of the last day of 2007.

At the moment, it appears bad news on the US housing market is a bit like French trains. It comes in thick and fast and on time. The analogy doesn’t end there either, because French trains are subsidised by the state; in the US, the housing market boom was subsidised by questionable short-term policies, and rock bottom interest rates.

The latest index from the National Association of Realtors revealed that sales agreements for pending sales fell 2.6 per cent in November, much worse than expected. The Association also cut its estimate for the fall in prices during the last quarter to 5.3 per cent on last year, down on its previous estimate. To complete the unhappy picture it has now put back its estimate for a recovery in the market to 2009.

But while the latest bad news on US house prices came into the station, the New York Times added to the feeling of disquiet when it suggested that US mortgage lending giant Countrywide had been falsifying documents relating to the bankruptcy of a homeowner in Pennsylvania. Countrywide denied there was any truth in the report, but while the air was still thick with denial the rumour mill ground out talk that Countrywide is planning to file for bankruptcy. It denies these rumours too, but these days a whiff of a rumour like that is enough to send markets into freefall.

Yet maybe we should not be too worried. Bloomberg surveyed 62 economists and found that the average expectation is for 1.5 per cent annualised growth in the first six months of this year. That is at the same level seen in the last quarter of 2007.

Bizarrely, although these economists are not expecting recession (the odds have been put at 40 per cent), they say it will feel like it. Bloomberg quoted Mickey Levy, chief economist at Bank of America Corp. in New York as saying “It’s soft economic activity that feels like a recession.”

Maybe the problem is this. Thanks to technological change, US productivity is rising, so if productivity is rising then GDP needs to rise just as fast, otherwise demand will not meet supply, and rises in unemployment will result.

The US is also beginning to import a little less and export a little more. So that’s good for GDP and good for correcting the underlying problems with the US, but it won’t feel like good news for consumers.

If, however, the US does manage to avoid recession, then it really will be a remarkable performance. After all, not so long ago they were saying that if the housing market stops growing, recession would occur, and yet subsequent events showed that house prices hadn’t merely stopped growing, rather they were falling.

Maybe the remarkable changes in technology really are making a huge difference, maybe it is “a new paradigm now.” The only snag with that argument is that history tells us that when people start saying, “Ah, it’s different this time,” then it’s time to get worried.