Different Sectors of the US economy
The housing market has been experiencing severe problems for over 12 months. House prices have fallen 10% from their peak and there is evidence that the fall in house prices is accelerating. [Source 1] For a long time rising house prices have enabled US homeowners to maintain high levels of consumer spending through equity withdrawal. The fall in house prices will definitely harm consumer confidence and consumer spending. The concern is that if house prices continue to fall, it will increase the number of people with negative equity and the fall in consumer spending could become quite damaging.
The troubles of America's 5th biggest investment bank, Bear Sterns, has been a significant development in the past week. It is illustrative of the problems caused by the credit crisis. Bear Sterns has lost significant investments in the subprime markets and other banks became nervous and started to withdraw their cash. The authorities hope it can be passed off as a one off, but, similar problems could potentially occur in other investment banks as well. There is still a real prospect of further credit defaults; many homeowners could soon face the prospect of higher interest rates as their introductory period ends. The blow has been softened by lower rates, but, this doesn't alter the fact many loans were inappropriate in the first place.
Students of the great depression will know how damaging any bank collapse can be to the economic system. Although Bear Sterns looks to have been rescued by J.P.Morgan there is a real danger that worse is still to come. (Forget soft landings at Guardian)
Falling Stock Markets
The falling stock markets are mainly a reflection of the economic and financial weakness. In particular the problem stems from the lack of confidence. One of the most worrying feature has been the way credit markets have 'frozen' 3 times in the past few months. The problem is even acute in triple AAA markets where loans are supposed to be very safe.
Note: Freddie Mac and Fannie Mae are two quasi government agencies responsible for issuing government debt.
Unemployment in the US is currently low 4.8% (data at US dept of Labour) However, 2008 has seen a worrying increase in unemployment and job losses. This has been particularly obvious in sectors such as construction and manufacturing. Since 2006 nearly 400,000 jobs have been lost in trade jobs (electricians e.t.c) and construction.
Weakness of the Dollar
The weakness of the economy and reduction in interest rates have only served to further weaken the US Dollar. Ironically, the dollar's devaluation is helping to boost US exports which at least help provide some growth. But, exports will not be able to take up all the slack from lower consumer spending. Also the weak dollar creates other problems such as more expensive imports and a decline in confidence about investing in the US.
The Good News on the US economy?
- Tourists are attracted to the US because of the low dollar
- Exports are rising, helping to reduce the trade deficit.
- The efforts to stimulate the economy - lower taxes, lower interest rates could prove successful in avoiding a full scale recession. However, there is also a danger that monetary policy will prove ineffective. i.e. even cuts in interest rates to 1% may be insufficient to encourage consumers to spend money. The gains from lower interest rates may not be able to offset the losses from the housing market.
- There is a feeling that markets may have overreacted to some of the bad news. Although others will argue that markets are still overvalued.
- GDP growth is still positive GDP stats
- However, most forecasts predict negative growth by May. The real question will be - how long lasting will the recession be?