March 10, 2008 | posted by Michael Baxter in US economy | comments (0) |

Capital Economics put it perfectly on Friday. “The debate is over,” and, “the US recession of 2008 finally started in February.”Why all this woe – the latest figures on US employment were released, and they were bad. In fact, in February, no less than 101,000 jobs were lost from the private sector. Be grateful for the government, because at least payroll numbers increased by 38,000 in the public sector in the month taking the overall drop in non-farm payrolls to 63,000.Paul Ashworth, Senior US Economist at Capital Economics, put it this way, “The 63,000 decline in non-farm payrolls in February is near conclusive proof that the economy is now in recession. Payroll gains in the preceding two months were also revised down by a total of 46,000.” Of late, bad news on the economy seems to have been just about the biggest export from the US. The US consumer confidence index produced by the Conference Board fell off the edge of a cliff in February, falling to 75, the lowest level in 5 years. To put that score in context, last July the index stood at 111.

Recently, the closely-watched Standard Poor’s Case-Shiller index recorded a 5 per cent fall in US house prices in the final quarter of 2007 alone. For the year, it had prices down by 9 per cent, by far the biggest fall ever recorded by the index – which, by the way, goes back to 1987. Funnily enough, however, returning to the payroll data, although the performance in February, and indeed January, was awful – it has actually been a good 12 months for US payrolls, and US unemployment still only stands at a modest 4.8 per cent. But then, that’s the trouble with growing economies. It’s growth that matters. To put this in a UK context, British High Street spending, for example, is actually very impressive – it’s just no longer growing at the rate we were used to – and this is what is causing problems.

But assuming Capital Economics is right, and the latest data proves the US is now in recession – this begs the question, what have the likes of the Fed, US Treasury and IMF been on about? Indeed, during the last few days, that great economist of our times, George Dubya Bush has denied the US is in recession.The truth is that the projections on economic growth that we are supposed to trust, have, or so it appears, been wildly optimistic.

Then there’s the markets. The Dow is now down to its lowest level in 16 months, it’s 9 per cent down on the start-of-the-year position and 16 per cent down on the all-time high set last autumn. But the real question that we should be asking is, why did the markets rise so high in the first place? It was obvious for all of last year that 2008 was going to be tough for the US, and yet, the Dow Jones set all-time records with tedious regularity for much of the year. Even as recently as the beginning of February, the Dow was around 900 points higher than Friday’s close. It seems that forecasters and traders alike should be asking themselves some serious questions – and for Joe Public, remember, much of economics is common sense – don’t let the experts bamboozle you with arguments that go against reason.

February 29, 2008 | posted by Michael Baxter in US economy | comments (0) |

Amid warnings of doom for the US economy, a piece of good news poked its head above the parapet yesterday.

First off with the dire warnings was Ben Bernanke. Alas, plain speaking Ben drew an unfavourable comparison with the dotcom crash.

Yesterday was the occasion of his twice-yearly report to the Senate Banking Committee, and the picture he painted was none too pleasing.

In fact, he suggested, right now conditions are worse than at the time of the dotcom crash: “The effects of the stock market declines were primarily on investments. In this case, consumers are taking the brunt of the effects.”

“Am I hearing you correctly” asked a worried Sen. Christopher J. Dodd, chairman of the committee,“That we’re in actually — we’re in a worse position today to respond to this than we were eight years ago?”

“I think that’s fair,” replied the hapless Ben, “in that both fiscal and monetary face some additional constraints.” He went on to say, “There probably will be some bank failures. There are, for example, some small, or, in many cases, banks that are heavily invested in real estate in locales where prices have fallen and therefore they would be under some pressure.”

Meanwhile, Tim Collins of Ripplewood Holdings, while at the Super Return private equity and venture capital conference in Munich, started drawing comparison with Japan before its so-called loss decade of economic growth, and said, “ “My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options…Even without a recession and with all of the policy tools available we still have hundreds of billions of dollars of losses.”

In Japan, a crash in asset prices was compounded by secrecy.. banks didn’t want to let on how bad things were, the government headed for the nearest sandpit, and buried its head. It doesn’t seem likely the US will go that way. But as Mr Collins said, “You have to wait for the tide to go out to see who is wearing a bathing suit.”

In other words, we still don’t know who is carrying the can for the credit crisis.

But then, returning to Mr Bernanke, he did strike a more pleasing note when he said, “I don’t anticipate stagflation, I don’t think we’re anywhere near the situation that prevailed in the 1970s.”

But actually, that is not the point. Our debt is so much greater now, and while inflation can be good for eroding the true value of debt in the long run, it will mean interest rates will have to shoot up – and in the short-term that could be very bad indeed.

By cutting rates at a time of growing inflation fears, the Fed could be making things very much worse down the line.

But here is the good news. Yesterday, the latest data on US growth was released. The stats are still saying the US grew at a tiny annualised rate of 0.6 per cent in the last quarter, but apparently inventory levels fell dramatically during the period. Once the stock of inventories is gone, then of course US businesses will have to go spending and replace this stock.

Rises and falls in inventories are one of the tell-tale signs of movements in the economic cycle.

February 26, 2008 | posted by Michael Baxter in US economy | comments (0) |

That Alan Greenspan has done it again. Every time he speaks he seems to be more pessimistic about the US economy. A year ago, he said there was a one-third chance the US would hit recession. He has since changed that opinion downwards several times, and then yesterday he went one step further.

“As of right now US economic growth is at zero,” he said yesterday. He added, “The existing financial problems are deeper than we’ve had for a while, so I wouldn’t be surprised if this recession is deeper than the last two shallow recessions.”

Poor old Ben Bernanke, there he is busy trying to create a veneer of wisdom, trying to talk things up, and there is Greenspan saying things like that.

“I try to avoid commenting on my successor because he has enough problems, said Greenspan”

Well you are right there, Alan.

When he was chairman of the Fed, Mr Greenspan used to talk about a conundrum. The long-term rate of interest, set by the markets, was lower than the short-term rate set by the Fed. This was known as reversion of the yield curve – and in the past, whenever this occurred, recession usually followed.

And yet, looking into his crystal ball, Mr Greenspan could see no sign of a recession – hence he called it a conundrum.

Actually, it wasn’t quite the mystery the Fed chairman portrayed. In fact, even in his book, Age of Turbulence, he came up with a good explanation for this conundrum – overseas markets were ploughing so much money into the US, that the high liquidity was keeping rates down.

The thing is, though, it is a different story now. In the US, the markets are no longer so cheap. In fact, the yield on a ten-year treasury note is now higher than it was in January.

The Fed has slashed rates, and the long-term rate of interest has gone up.

It’s a kind of conundrum mark II.

But really, it seems, there is even less of a mystery. Richard Whiteley will be turning in his grave at the thought that the word conundrum is being used to describe something so simple to understand.

You see, the Fed has now cut the rate of interest so that it is lower than inflation. US inflation is 4.2 per cent, the rate of interest 3 per cent – or negative 1.2 per cent in real terms. The markets are not impressed – well, why should they be; that’s why the yield is going up and up.

February 21, 2008 | posted by Michael Baxter in US economy | comments (0) |

This is the strange thing. As you know the Fed is doing all it can to get the US economy moving again. The last few months have seen an extraordinary run of interest rate cuts, with the official cost of borrowing falling by 2.25 percentage points to 3 per cent in just four months. And yet, US inflation, the very thing that the rate of interest is supposed to combat, is going up almost as fast as rates are going down.

The latest set of data tells a sorry story. The annual rate of US inflation rose to 4.3 per cent in January, while the underlying rate, that’s the data with food and energy taken out, rose by 0.3 per cent in the month from December to January – that’s the highest rate of monthly inflation measured by this index in 18 months.

And yet, just to repeat, the US interest rate is 3 per cent – or, to put it another way, the real cost of borrowing is minus 1.3 per cent.

It seems the Fed is not merely putting the US growth horse before the inflation cart, it is putting it before just about everything else, too. At a time when US citizens should really be saving more, after all, Uncle Sam too is sitting on a demographic time bomb – it is encouraging its citizens to spend their way out of trouble. It really is a case of the pub turning to the drunk, and saying, “Here, have another drink, that will make you feel better.”

You can see the Fed’s dilemma – just take a peek at its latest projections for growth, also out yesterday.

The Fed now reckons the US will expand by between 1.3 and 2 per cent this year. The last time it stuck its fingers in the air, felt the economic breeze and pronounced its projections for growth – it predicted growth of between 1.8 and 2.5 per cent.

This does raise a worry. For some time, the Fed’s projections have been more optimistic than projections from elsewhere. Yet, if anyone should know what is going on, it should be the Fed, so one is naturally inclined to believe what the Fed is saying over all the doomsters. Yet, it keeps downgrading its estimates, the last projections were announced last October. So it is like this. The Fed surprises everyone and says things are not as bad as others are saying. We believe the Fed. Then, four months later, it changes its mind, and says well, actually, what people were saying at the time of the last projections was perhaps about right, after all. But by then, the doomsters have got even more pessimistic. Is the Fed just behind the curve?

Now, some might argue, of course, that as the economy is slowing, inflation will fall eventually – there must be forces beavering away in the background having a dampening effect on inflation – give it time, goes this argument, and the Fed’s rate cut will be justified.

There is one snag with this argument. Some put this era of low inflation which we have been enjoying for the couple of decades down to clever central banks and new wisdom amongst economists on what causes inflation. In other words – inflation has been low because economic policy has been right.

But maybe this analysis is wrong. Maybe, actually, the era of low inflation and high growth was a fluke. Maybe, the real cause of low inflation was, first, leaps in technology, leading to greater productivity, leading to an ability to produce more goods for less. Then the Internet helped promote price competition, and then, of course, we had the rising influence of globalisation.

Maybe all these effects have worked their way though the system now.

Some economists dismiss the recent surge in the price of oil and food and other commodities saying these are just one-offs – there will be no lasting inflation hangover. But maybe the factors that have led to deflation of other goods – are just as much one-offs.

In slashing rates now, when the likes of Alan Greenspan have been warning a new age of higher inflation appears to be upon us, seems to be a high-risk strategy.

In two or three years’ time, when, perhaps, Barack Obama is sitting in the White House, we may well find that the US, and in turn the rest of us, will be counting the costs of today’s policy decisions.

February 15, 2008 | posted by Michael Baxter in US economy | comments (0) |

All eyes turned to the US yesterday, where markets saw another nosedive on a string of highly significant developments, some bad, some actually quite good. But cut through all that, and all of a sudden a bright new idea shines through. Here is an idea which will solve all of Uncle Sam’s ills, and enable George Dubya to leave office while the economy is booming. There is just one snag – this clever wheeze could leave the US economy in a right sorry state – during the midst of the next President’s tenure.

Actually, there were three major developments yesterday:

Development number 1: Fed chairman Ben Bernanke and US Treasury Secretary Henry Paulson sat before the Senate Banking Committee yesterday, providing their latest testimony. Bernanke admitted that the US economy is in worse shape now than he had expected when he made his previous testimony. But, both he and Hank made a passing impression of a record that was stuck in its groove, when they repeatedly said the US would avoid recession.

And Mr Bernanke dropped a big hint that further interest rate falls are set. “The Fed,” he said, “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks”.

But above all that the two men sounded bold triumphant notes of optimism. The economy “is fundamentally strong, diverse and resilient” said Paulson, adding, “I believe our economy will continue to grow, although its pace in coming quarters will be slower than what we have seen in recent years.”

And the two men say that while things will be tight over the next few months, as the full effects of the rate cuts and tax credit take hold, the economy will then recover nicely.

One senator at least was not impressed and said that both the Fed and US Treasury had “hit the snooze button,” but added he wasn’t trying to talk the economy down.

“If you’re trying to talk the economy up, I’d hate to see you talk it down,” retorted Paulson, triumphantly.

“I’m just trying not to hide my head in the sand,” replied the senator.

And from snoozing to wise-up, the most sprightly octogenarian former chairman of the Fed in the world today, Alan Greenspan, seems to have his eyes fully tuned in to the downwise. It was about a year ago now when he warned there was a third of a chance of a US recession. Then later in the year he said the chances were 50/50, but yesterday he went a step further. “We are clearly on the edge,” he said.“

And that’s development number two, the latest musings of Greenspan. “While we are at stall speed in the US at the moment, we haven’t yet seen the discontinuity that characterises recession,” said the 81-year-old. “American business was in such extra-good shape before this problem hit. Otherwise we would be talking about how long and how deep. We are not there yet.”

Then he gave a nice little soundbite “Home prices will continue to weaken,”‘ he said. “When a bubble breaks, you go to primordial fear.”

But while Bernanke was doing a passing impression of a headless chicken trying to calm everyone down, and Greenspan talked of “primordial fear,” data was revealed yesterday that really should have you sitting up.

Development three, was news that the US trade gap fell by 6.1 per cent last year. According to the Commerce Department, the 2007 deficit hit $711.6bn, from $758.5bn in 2006. Now there are two ways of looking at this deficit. You could say, “so what,” it is still twice the level seen in 2001. On the other hand, you could be celebrating the fact that this was the first time in six years that it didn’t go up on the year before.

There’s some more good news, exports shot up – well they were up 1.5 per cent. That’s what is needed, imports to stay high – meaning the US is still buying goods from the rest of the world, but exports rise to meet imports.

There is a snag. If you strip out petroleum imports from the equation – then actually imports were down 2.8 per cent – suggesting demand really is suffering in the US, after all.

But now it’s time to reveal the clever wheeze.

The rate of interest in the US is now down to just 3 per cent, from 5.25 per cent six months ago. It seems likely, based on what Mr Bernanke has been saying, that rates will fall further still, perhaps to 2.5 per cent.

But this raises some important questions. If the US economy is as strong as Mr Paulson says, why this massive cut in the cost of borrowing?

Well, we all know Uncle Sam is carrying a huge burden of debt – that’s fiscal, consumer and corporate debt. Inflation in the US is still north of 4 per cent – so if rates fall to 2.5 per cent, and inflation stays high, the real cost of borrowing is well into negative territory.

Such low rates will probably lead to further falls in the dollar, who knows, maybe it will go into freefall, and inflationary pressures will build and build.

But, hey, debt gets cheaper. Inflation will erode the true value of debt. Abracadabra, the Fed has solved the big problem that has been threatening to crush continued US success.

There is a snag, however. Such a policy will leave a legacy of inflation. Remember the Barclays Capital Equity Gilt Study 2008 we talked about yesterday “The net result of intensifying natural resource scarcities is an increase in structural upward pressures on inflation and a worsening trade-off between inflation and growth. To prevent the inception of an inflationary spiral, in the future, monetary policy-makers will have to become somewhat tougher than has been the case over the past two decades.” It said.

The Fed appears to be doing the precise opposite of what the Barclays Capital report says is necessary. It is taking the opposite approach of the more inflation-alert Bank of England and ECB. Somebody, somewhere, is horribly wrong, and if it’s the Fed, then the next President will pick up the can – and what a very heavy can it will be too.

February 8, 2008 | posted by Michael Baxter in US economy | comments (0) |

One of the curiosities of the US economy at the moment is this. If the roof is, quite literally, coming off the housing market, how is it that consumer confidence has managed to remain relatively robust?

For some time, economists have been warning that you write-off the US consumer at your peril – and it appears that Uncle Sam and Auntie Samantha’s appetite for spending is just as insatiable as ever.

It was the strength of the US consumer sector that recently led the National Institute of Economic and Social Research (NIESR) to predict only a mild slowdown in the US this year, with projected growth of 2.2 per cent – not half bad.

Yet, somehow it doesn’t gel. With other economists saying the US is already in recession, with the likes of George Soros talking about the worst economic crisis since World War II, how can the US possibly manage the growth projected by NIESR.

Well, maybe the answer is this. Maybe the US consumer, just like the US trader last year, has got his, or maybe it’s her, head stuck firmly in the sand.

According to a survey of 1,619 home-owners conducted by Harris Interactive for Zillow.com, just 23 per cent of the respondents said they believed their home had lost value over the last 12 months. In contrast, 36 per cent said they thought their home had increased in value, and another 41 per cent said it had stayed flat.

Now, Americans are by nature an optimistic lot. And so often this has been proven to be a good trait.

But last year’s exuberance by US markets seemed totally uncalled for, and this is not being wise in hindsight. We said so over and over again, and so events proved us right.

There is overwhelming evidence to suggest that US house prices have fallen over the last year, so there are only limited explanations for the results of this survey.

Firstly, maybe the data on house prices in the US is wrong – not likely. Maybe the survey did not use a sufficiently-large sample, or the results were biased in some way – perhaps focusing on regions where the market remained relatively strong.

But it seems the most likely explanation is that US homeowners have not woken up to reality.

Just like in the UK, there seems to a nationwide tendency to talk up houses by the bodies who are supposed to provide objective data. For example, the National Association of Realtors reckons house prices will be flat in 2008. Yet Merrill Lynch recently predicted a 15 per cent drop.

The truth is, someone, somewhere is wrong.

Someone is either far too optimistic, or someone else far too pessimistic.

Are the banks right with their pessimism, or are they merely blinded by their own mistakes? Warren Buffett recently called the problem inflicting banks to be “poetic justice” – maybe it’s a justice the banks just haven’t got their heads around yet.

February 6, 2008 | posted by Michael Baxter in US economy | comments (0) |

 There’s bad, and there’s downright dreadful, and yesterday’s latest economic data on the US fell into the second category. As a result, markets across the world did a nosedive.

These days, of course, we have become used to big daily falls in the stock market, with the Dow Jones falling by more than 300 points no less than five times last year. Even so, yesterday’s fall in the US was a big one, down by 370 points – only twice last year did the index put in a worse performance.

The collapse in shares followed a collapse in an economic index.

The Institute of Supply Management index for tracking non-manufacturing fell from 53.2 to 44.6. ISM indices usually only suffer falls of this magnitude when there has been a major shock, such as 9/11. For the index to suffer this big a slide during times of normal external conditions, is unprecedented.

Any score below 50 indicates that the sectors covered by the index are in recession.

Many economists were struggling to explain the big fall. Capital Economics, for example, said, “Given that the non-manufacturing ISM has typically rebounded almost straightaway from similarly sharp falls in the past, we would need to see at least two months of weak data before giving it much weight.”

It does seem that there is a possibility the US is talking itself into recession. Apparently, only 14.6 per cent of firms covered by the ISM survey said that the credit crunch was affecting their ability to obtain regular or additional financing.

Instead, it seems firms are more worried about the effect of a credit crunch on customers. But as Capital Economics said, “It is odd then that they themselves have been largely unaffected.

Right now, there are lots of oddities about the US economy. Despite the appalling mess of the US housing market, consumer confidence has not collapsed, as you might have expected. As a result of this, last week the National Institute of Economic and Social Research predicted that US growth this year would be above 2 per cent.

And yet, in the final quarter of last year, the US grew by an annualised rate of just 0.6 per cent – that is tiny and barely above recession level.

All we can say is, watch this space as the saga unfolds.