Investment Markets » Construction and Property
Is America Heading For Recession?
With house prices tumbling and credit conditions biting, the US economy is in perilous waters. Can the Fed save the day?
Osama bin Laden has never been thought of as much of a market guy, yet there he was on TV issuing dire pronouncements about the state of the US economy. If the US sub prime mortgage crisis has reached the inner sanctums of the al-Qa'eda leadership bunker, you know it must be pretty serious.
Bin Laden's timing was impeccable. On the day he released his video, the US government released a set of employment statistics that were a bigger horror show than even the terrorist leader's ramblings. The number of non-farm jobs was expected to rise by 120,000 in August; instead they fell by 4,000: the first such fall in four years.
The figures are consistent with a sharp slowdown and while recession is not inevitable, perhaps not even probable, it just got significantly more possible.
The normally tight-lipped governors of the US Federal Reserve have embarked on an unprecedented information exercise, criss-crossing America to convince businesses and consumers that the mortgage meltdown is under control. An interest rate cut is seen as inevitable and some expect the Fed to shave off half a point – a clear sign of the seriousness of the situation.
Forget the talk of moral hazard – that cutting rates rewards the risky behaviour that caused the crisis. Inaction on those grounds would be like a doctor refusing to treat a heart-attack patient because of his bad diet. The worry now, given that it takes 18 months for a rate cut to have an effect, is that the move comes too late: the OECD has already reduced its forecast for US growth this year to 1.9%.
It is to the US consumer that central banks will be looking. If consumers feel poorer, it will weigh heavily on the US economy – and perhaps the world. But so far there's little evidence that weakness in the housing market is dragging down the rest of the economy, and given the size of the US workforce, it's a mystery why the loss of 4,000 jobs should presage a recession; the clear danger is that America ends up talking itself into one.
It's certainly true that many more recessions have been predicted than have occurred. Yet house prices are falling at an annual rate of 4% – an event not seen since the Great Depression – and the downward trend is accelerating. Ultimately, one fact stands out on its own: Over the past half century, every US housing downturn as sharp as the current one has translated into recession.
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