Shopping spree ends as US recession looms large
Nov 30, 2007
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The “R” word is back, said Gary Duncan in The Times. Wall Street still expects the US economy to expand by around 2.2% next year after a dip over the next few months, but the mainstream press is abuzz with the prospect of the American economy contracting.
Of US households, 40% now expect a recession in the next year; Goldman Sachs says the risk of recession has risen to 40%-45%; and according to former Treasury Secretary Larry Summers “the odds now favour a US recession that slows growth significantly on a global basis”.
Why consumers will struggle
The bad news is piling up. The S&P/Case-Shiller index of national house prices fell by 4.5% year-on-year in the third quarter, a second successive record low reading, and a glut of unsold homes – being swollen by an increase in repossessions – means prices have much further to drop. That bodes ill for consumption, which comprises 72% of GDP.
Rising house prices have underpinned a borrowing and spending spree as consumers have felt wealthier and extracted equity from their homes. But falling prices and tighter credit, due to the subprime crisis, mean this game is over for households, which owe 130% of their disposable income and are short on savings.
Furthermore, fuel costs have risen rapidly while monthly net job creation has slowed, with the number of Americans out of work for 15 weeks or more climbing steadily – as it has before every US recession since the 1970s, said David Rosenberg of Merrill Lynch.
“After years of living beyond their means, Americans are finally facing financial reality,” Fortune’s Colin Barr. The outlook for consumers is “grim”, said Capital Economics, which foresees inflation-adjusted consumption growth tumblingto 1% this quarter and GDP shrinking by 0.5%.
What next for the US economy?
Given all this, it’s no wonder consumer confidence has slid to a two-year low, with a subindex measuring expectations of future conditions hitting a four-year low.
Signs of consumers cutting back abound: October retail sales, excluding petrol, were flat, while Starbucks has reported its first year-on-year decline in consumer traffic. Holiday season sales got off to a reasonable start on the “Black Friday” after Thanksgiving, but that day is “not a predictive bellwether” for the rest of the season, as Lex noted in the FT, and spending per shopper was 3.5% down on last year over the weekend.
Investors are counting on the Fed coming to the rescue by slashing rates, but its concern over inflationary pressures and the tumbling dollar mean “these hopes look to be hanging by a thread”, said Gary Duncan. Throw in the fact that mainstream forecasters usually fail to predict them, as The Economist pointed out, and a recession looks “all too plausible”.
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