If the United States economy isn’t in recession, it’s because of a statistical oddity driven by the still booming export sector.
The surprise fall in retail sales last month signals that US consumers, the great engine of the US economic growth in the past five years, have finally said “enough’s enough” and snapped their wallets shut. The pressure is now on the US Federal Reserve to immediately cut interest rates by half a per cent to 3.5%, after retail sales fell 0.4% in December, the biggest month of the year for US consumers and retailers.
Producer prices also fell last month and if tomorrow’s consumer price index is good or flat, then the way will be clear for the Fed to reveal an “inter-meeting” rate cut before its scheduled meeting on January 29 and 30.
When the Fed started cutting rates last year it was seen more as a bail out of Wall Street and its sins than an attempt to limit the damage to the wider economy, but that changed in November and it is now clear the US economy has slowed to stalling point and could very well tip over soon.
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The latest sales figures, which came along with that shocking multi-billion loss for Citigroup, knocked the US stockmarket. Monday’s 170 point gain after solid earnings from IBM, was reversed with the Dow down more than 270 points.
Sales declined for the first time since June, following a revised 1% gain in November. That means the normally buoyant post-Thanksgiving period wasn’t as strong as previously thought. Food sales are holding up, as you’d expect, cars are patchy, but strip them out and there was a very sharp slowdown from November to December in many categories.
The drop was led by a 2.9% fall at building-material stores (such as Home Depot), the biggest since February 2003, reflecting the slump in housing. But sales at clothing, electronics and sporting-goods stores also fell, all major areas of discretionary spending, and a good sign of the consumer pullback.
While WalMart may have reported a small sales gain last month, the rest of the US retailing industry had a bad season. Profits will take a big hit when they are disclosed in the next few weeks.
Taken with the December jobs figures, with the unemployment rate up to 5% (and up over the year), the economy has been badly damaged by the subprime mess, the housing slump and credit crunch.
Optimists who believe the booming export sector (which is cutting the US trade deficit in a significant fashion) will stop the US from slowing are kidding themselves: especially so when major consumers such as Europe and China are slowing and Japan is also on the verge of recession.
The rest of this week sees the vital new home starts and building permit figures. The US economy’s problems are being driven from the housing sector: for months economists and others refused to believe that it could halt the wider economy. But because of the pernicious impact falling house prices have had, and will continue to have on mortgages, and their related securities, and therefore on the balance sheets of banks and other investors, housing’s importance will not go away quickly.