Research Dept. News
|
|
|
|
Monthly Report, num 305 - September 2007
|
|
|
International review - United States
|
|
|
|
|
United States: sub-prime mortgages work against household consumption
|
|
United States grows at 1.8% with lower consumption and more exports.
|
|
During the 2004 electoral campaign, George W. Bush showed off his economic achievements with satisfaction. He had good reason. His expansionist fiscal policy with its tax cuts had lowered the effects of a major stock market crash. But most of the success was due to easy financing which not even the president’s most loyal supporters had expected. The easy money policy of the Federal Reserve, the globalization of commerce and financial engineering worked a miracle of confidence, lowering interest rates and especially bringing down risk premiums.
|
|
Loss of confidence and credit restrictions sharpen consumer slowdown.
|
|
The low cost of capital this brought about contributed to raising company profits to new highs but caution meant that investment did not follow the same upward track. Nevertheless, help was on the way. Since 2000, low interest rates gave support to a cycle of appreciation in the value of real estate which, because of the wealth effect and mortgage loans at advantageous rates, boosted private consumption, which has been the main player in the current cycle. Private consumption and public spending have raised the current account deficit above 5% of gross domestic product (GDP) but the central banks in Asia and confidence in US securities have facilitated the financing of this deficit.
|
|
|
Investment not taking off.
|
|
It is this confidence that has meant that high oil prices, a dropping dollar and interest rate increases by the Fed failed to dampen spirits. At the start of the problem of sub-prime mortgages (granted to borrowers with low credit rating), the housing sector went into recession but economic activity continued to find support in private consumption that continued strong. Figures for GDP in the second quarter show, however, that this could be coming to an end. The economy grew by 1.8% year-on-year with an appreciable rise over the first quarter. But the rise was largely due to July revision of previously published quarters which this time was clearly downward. Furthermore, private consumption ended up dropping with growth at 2.9% year-on-year as against 3.2% in the first quarter, a slowdown that in quarter-on-quarter terms was much more abrupt, going from 3.7% to 1.3%. These decreases were equally shared between durable goods, such as cars and furniture (which were more volatile), and non-durable goods under which food showed major drops. This was not the case with petrol consumption and the fact is consumers are aware that the confidence which allowed them to go heavily into debt is now on a downward track.
|
|
Retail sales slow down but consumers more optimistic than business executives.
|
|
Investment in capital goods left behind the unfortunate first quarter without much shine, marking up slim growth of 0.1% year-on-year. The drops in construction were somewhat smaller but the key sector of data-processing and telecommunications did not join the tentative increase in industry. Only industrial construction showed any strength. The expected recovery in the foreign sector was the best figure in GDP, with a quarterly contribution to growth of 1.2% in annual terms, following various quarters taking away strength, although the improvement was due more to an easing in imports because of lower consumption than to confirmation of a recovery in exports. This downward revision of GDP figures means a reduction in growth potential of the economy which stands at the highest possible rate of increase using all its production resources without causing inflation.
|
|
|
|
|
In keeping with the slowdown in consumption, retail sales (excluding the volatile headings of cars and petrol consumption) rose by 4.7% year-on-year in July, 2.5% in real terms discounting price increases, which meant that the growth rate did not reach half that seen in 2006. The consumer confidence index put out by the Conference Board in July rose by from 105.3 to a level of 112.6 points. But in view of other indicators showing drops this gain could be lost in the future. The view of business leaders, which is more in line with the times, is headed in the opposite direction. The economic activity index for July put out by the Institute for Supply Management went from 56.0 to 53.6 points for manufacturing and from 60.7 to 55.8 points in for services. While the level is still above 50 points, which indicates a predominance of optimistic replies, there were significant decreases and the main support comes from exports and prices and not from domestic demand. Also on the supply side, industrial production continued its slow progress with an increase of 1.4% year-on-year.
|
|
Housing sector still failing to recover...
|
|
In turn, housing is going through its particular «witch hunt». The proportion represented by sub-prime mortgages is small but the drop in confidence equally affects individuals and financial institutions and now, as seen in loan markets, any leverage is looked at askance even though the figures are reasonable. The result is a market that has come to a stop with existing housing sales dropping by 11.1% year-on-year in June and new housing down 22.1%. The strong desire to reduce housing inventories meant that housing starts in July were very weak with a further drop of 20.9% year-on-year which put them 40% below the high in January 2006. Only prices maintained the levels of last year with very slight decreases but, in view of the properties for sale, recovery remains some way off.
|
|
|
...but inflation holding at moderate levels while trade deficit down.
|
|
Up until its recent change in attitude, the position taken by the Federal Reserve had insisted more on inflationary risks than on lower growth. However, the former seems to be losing strength with the consumer price index (CPI) dropping to a growth rate of 2.4% in July. The underlying component, which in the United States excludes food and energy, repeated the 2.2% seen the month before and, without including home rentals which eased sharply, prices rose by a mere 1.2%. In spite of the recent increases in labour costs, which may be attributed to end-of-cycle delays, and with consumer spirits down, the inflation front seems to be calm.
|
|
|
|
The labour market continued a moderate downward trend with non-farm labour for the last 12 months growing by 1.4% year-on-year as of July as against 1.7% at the beginning of the year. The unemployment rate rose slightly to 4.6%, a still considerably low level. The trade deficit for July was 58.13 billion dollars which meant a drop of 9.9% year-on-year in which, without ignoring the growth of exports, the key factor was an easing off in imports.
|
|
|
|
The US economy has clearly strong features in corporate profits, a labour market that is still strong and a foreseeable recovery in the foreign sector but, as president Franklin D. Roosevelt ever said years ago, the only thing we have to fear is fear itself.
|
|
|
You can susbcribe now to be nofified by email every time the Monthly Report is updated in the internet.
|
All documents are in Adobe Acrobat format (PDF).
To view a document in PDF format you need the Adobe Acrobat Reader. If you don’t have it already loaded on your computer, you can donwload it now.
|
|
Direct link to the Research Dept. in your mobile
We'll send you a free SMS with the link
|
