No wonder Fed chairman Ben Bernanke has noted that there were “significant downside risks” to the outlook for the US economy, said The Economist. So far this year US growth has held up surprisingly well, with the second-quarter figure now expected to reach an annual rate of 2%, after 1% in the first. But “what supported the economy above the zero line in the first half will fade away”, said Merrill Lynch’s David Rosenberg.
Pillars of growth are crumbling…
Strong exports, boosted by a weak dollar, have so far been a key pillar of support; trade added over 1% to growth in the year to the March. But tighter monetary policy in Asia, thanks to rising inflation, and the worsening outlook in the developed world, point to weaker global growth and exports. A non-residential construction spurt in the first half is unlikely to endure now that office vacancy rates are rising and retail chains are closing stores.
Recent buoyancy on the part of America’s embattled consumers also looks like a last gasp. Tax rebates may have added around 2% to consumption growth, as Krishna Guha noted in the FT. But now $92bn of the $110bn of tax relief has been disbursed, and June’s marginal rise in retail sales, suggests the impact of this one-off stimulus is already fading.
…and the credit crisis marches on
The wider problem, as Rosenberg said, is that “there is unlikely to be a bottom in anything” until housing troughs, and it’s nowhere near. Tight credit – fixed-rate mortgages are 0.5% up on a year ago – is choking off demand and 11 months’ supply of new inventory is hanging over the market. Housing is also still overvalued compared with incomes and rents, said James Saft in the International Herald Tribune: “we’re only 50%-60% of the way down”.
All this portends more pressure on consumption as consumers’ wealth falls and further losses at banks. On that score, the bad news is that “consumer credit now appears to be catching up with the deterioration in housing”, as Lex said in the FT. Credit card delinquencies are on the rise and American Express has reported weakening spending and credit quality “across the board”. Meanwhile, Wachovia, the fourth-largest bank, has announced a record March-June loss and has raised its second-quarter provision for losses on bad mortgages and other loans to $6bn from $179m the year before.
More losses at banks as the economy weakens imply a further cutback in overall bank lending – already contracting since mid-March – and hence even more downward pressure on growth. The basic dynamic of the credit squeeze is a “negative-feedback loop from a damaged financial sector to the real economy and back again”, as Guha put it. Recession may have been avoided so far – but it appears increasingly inevitable.