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Saturday, October 22, 2011

US Economy Stalled - 2011

US Economy Stalled
BBC News

The US government has released its latest set of economic growth figures - which includes a set of revisions going back all the way to 2003. The figures show that the recession - in 2008 and 2009 - was actually much worse than thought.

And on Friday, the Commerce Department said that second-quarter growth was much weaker than first thought, and revised the previous quarter down sharply - from 1.9% to 0.4%. So just what it is holding back the US economy? Deeper recession.

One of the most telling facts of the set of revised figures is the new insight it gives into the extent of the recession. "At the time, we were thinking that the numbers weren't as bad as what we seeing," says Carl Riccadonna, an economist at Deutsche Bank in New York. "Now we know that the recession was deeper than we thought."

While the length of the recession - when the economy was shrinking - stayed the same, the contraction in real terms from the peak to the nadir was 5.1% - one percentage point more than thought. Businesses can't hire until consumers start spending, but people won't spend unless they're sure they have jobs”

Carl Riccadonna Economist, Deutsche Bank Trillions were committed to bailing out the economy at the time - and the US economy is still in a hangover from the heady growth of the mid-2000's.

The anaemic growth in the US economy is simply explained, according to Mr Riccadonna. "It's the weakness in consumer spending," he says. "The numbers are picking up half as well as they normally do in a recovery." Consumer spending accounts for 70% of the US economy. Add to that, in a remarkable change in habits, people are saving more.

The savings rate has gone from zero at the height of the economic boom to about 6% now - which is billions of dollars being diverted from the economy and set aside. With interest rates at record lows in the US, meaning that savers are getting little return, this illustrates how nervous US consumers are now of spending their money. Especially on expensive one-offs, like a new house.

"You have all these longer-term problems, like a particularly poor labour market, very tight lending conditions and the housing market in a double-dip, with [property] prices still falling," says Paul Dales, an economist at Capital Economics.

In the second quarter, for example, personal consumption only rose at an annualised rate of 0.1% from the previous three months. Proof of that is exports have remained strong. Exports rose at an annualised rate of 6% in the second quarter. Last year, they rose 11.3% from 2009. So the weakness is due to Americans themselves. Why? Perhaps because the number of jobless remains stubbornly high.

Economic Reports Indicate U.S. Economy Heading Down

Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July. Weekly jobless claims rose again this week, coming in at 428,000. All are pointing to an economy in trouble.

The Great Recession began in the housing market after subprime loans started to default in large numbers in 2007. The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.

Meanwhile, U.S. retail sales are declining if you take inflation into account. Retail sales increased strongly with rising home prices in the first years of the 2000s, but after the housing market turned south they have yet to recover. They have been held up by trillion dollar plus annual federal budget deficits, Federal Reserve money printing, and government stimulus programs including the "Cash for Clunkers" gift to the auto industry. Despite all of these efforts, retail sales and food services were up 0.0% in July (the same 0.0% for jobs created in August). The mainstream media reported 0.1%, but this is only the retail sales component of the report. The report is not adjusted for inflation, so even if retail sales rose 10% a year, but inflation was also 10%, there would be no actual growth (although that is not the story you would get from mainstream news sources).