The US recession isn't over
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Associate Editor
David Stevenson Oct 30, 2009
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Last week, we learned that the UK was still stuck in recession, contrary to expectations. But there were no such disappointments for Americans yesterday.
In the year to the end of June, US GDP shrunk by 3.8%, the worst performance in seven decades. But since then, during the three months between July and September, the world's largest economy has grown by a better-than-expected 0.9%. That works out at an annual rate of 3.5%.
So has the US turned the corner, or is there more bad news on the way? And where does this leave Britain?
Don't be fooled by phoney US numbers
"Ding, Dong, The Recession Is Dead", says Steve Schaefer in Forbes.
No wonder the bulls are cheerful. American GDP was expected to rise in the past quarter, but the rebound was even better than most economists had forecast. Surely that's proof that the States is now firmly on the comeback trail?
Well, I wouldn't be so sure. Take a glance at the small print and the numbers aren't as impressive as they first appear.
In fact, the closer you look, the more the whole thing starts to look like a piece of dramatic fiction. It's been based on two main themes. There's been the government-driven "cash for clunkers" programme, which has incentivised car owners to trade in their old bangers for brand spanking new models. Meanwhile, potential first-time homebuyers have been enticed by an $8,000 tax credit to snap up one of the wagonload of American houses that currently stands empty.
In other words, almost all the expansion over the last quarter has been funded by US taxpayers. It's not been real growth at all.
So maybe it's not surprising that more or less the only ones who reckon the recession is over are economists. People on the street aren't fooled so easily. A Wall Street Journal/NBC News poll has just found that fully 58% of the public - up from 52% in September - believe the recession still has some way to go. And just 29% of those polled believe that the economy has hit bottom.
Growth ends when the stimulus stops
They're probably right. For a start, those government schemes can't keep running forever. There's a limit to the number of perfectly serviceable old jalopies that can be sent to the crusher in the name of economic growth.
Further, the housing tax credit scheme is due to finish at the end of November. Although there are rumours of an extension to the latter for up to another 12 months, there's another potential problem - it could do much more harm than good.
According to Simon Johnson and James Kwak of the Washington Post: "it's highly inefficient" in stimulating consumption, and only "benefits people who already own houses (and their estate agents) because it's a one-time boost in housing values". If the US government's policy for restoring the economy to good health revolves around the tax credit scheme, it's time to get very worried.
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Why? Because the housing market - which is key to any sustained recovery - is still in a right mess. New home sales in September fell by 3.6%, to a level almost 10% below consensus expectations. And remember, that celebrated 3.5% GDP growth rate only covered the quarter up to September. Since then, several of the major economic indicators have started to look bad again. Consumer confidence is sinking once more, while last week home loan applications fell 12% on top of a 14% slide the week before.
David Rosenberg of Glusken Sheff, who for months has been debunking myths about the durability of any US recovery, points out that "in a sign of just how tough it still is for home builders to lure buyers into a sale", it's currently taking a record 13 months, on average, from start to finish in the purchase process - in a normal market, that lag is closer to four months. Meanwhile, he says, "wages, credit and rents are still deflating. There's going to be some very tough slogging ahead as far as the economy is concerned".
In a nutshell, for the US, this 'recovery' looks like a false dawn. And that's not likely to prove good news for Wall Street. US shares have enjoyed a big rally recently – and jumped up sharply on yesterday's news. But that could prove to be the last chance to sell. Andrew Smithers, who runs his own research house, has no time for "those who claim that US equities are cheap", says the FT. His conclusion, after looking at both earnings and asset valuations, is very clear indeed – "US equities are 40% overvalued".
So keeping out of the US market certainly seems the best bet for now.
Beware a British stock market bubble
And what of Britain? We've been left "out in the cold" by the news from the US, says Grainne Gilmore in the Times, as "the world's only major economy left in recession". That's bad enough.
But if the US recovery stalls, as seems likely, our own chances of recovery will look even worse. As we said yesterday in Money Morning (Why the stock market's ready to tumble), the stock market over here appears to be forming yet another bubble. Any misplaced euphoria on the latest news from across the Atlantic – sending the FTSE higher – looks like it would be a good selling opportunity.
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