Amid all the talk about the improving performance of the US economy (second quarter growth next week will be upgraded to an annual rate close to 3% from the first estimate of 1.9%) the US is still a rich source of bad news. Here’s a quick wrap of the latest bad economic tidings from the US.
Winter heating bills not a gas. Everyone has talked about the positive impact of falling oil and petrol prices: standard US petrol hit $US3.77 a US gallon at the weekend, compared to the high of $US4.11 a gallon on July 17. But as the American summer ends, attention is now turning to the impact of the coming winter and home heating bills. You can cut back your driving, but in winter you can’t cut gas bills and power bills by much unless you want to freeze. But it seems that millions of Americans may well try that given some of the estimates around for heating bill increases this coming winter.
According to the US Government’s Energy Information Administration US consumers are expected to pay $US1,182 to heat their homes this northern autumn, winter and early spring, up 20% from last year. Here’s the really bad news.
Residential heating oil prices during the upcoming heating season (October though March) are projected to average $4.34 per gallon compared with $3.31 during the last heating season, an increase of about 31 percent. Residential natural gas prices over the same period are projected to average $15.58 per Mcf compared with $12.72 per Mcf, during the last heating season, an increase of about 22 percent.
But in the northeastern states where an estimated 8 million households depend on heating oil, the bill will be even higher, an average of $2,725. Like the rise in petrol prices, those higher heating costs (along with higher power prices) will make a mess of home budgets.
Mrs Fields put out to pasture. Americans are not eating like they used to. The Mrs Fields Famous Brands chain of cookie shops has gone bust. It has filed for Chapter 11 bankruptcy protection after blaming “aggressive competition” in its franchising business and a decline in customer traffic at shopping malls — which cut revenues and profits.
Mrs. Fields has nearly 390 location in the US and around 80 locations abroad. Meanwhile America’s chocolate company, Hershey’s is struggling with high costs and slowing sales. It lifted prices 11% on Friday, warned of sliding earnings growth and indifferent sales. The company said it now expects sales volumes in the fourth quarter and next year to be lower than previously estimated.
Hershey said sales growth will slow in 2009 to a year-over-year rate of 2%-3%, compared with the previously projected 3%-5%, while earnings growth for the year will fall short of its 6%-8% long-term target. It’s not the last US food and confectionery group to be feeling the pain. Mrs Fields is the 7th US retail chain to file for bankruptcy protection this year. So much for the ‘relative’ safety of the US economy.
Good mortgages following bad. The big imponderable is the US housing slump. Some excitable analysts (such as those at Barclays) claim to have found a bottom emerging in the US housing slump: with new home sales figures out this week there will be more talk in this vein.
But consider this: if subprime mortgages are a dog, and the next rung up, the Alt-A and jumbo mortgages are starting to perform badly (so badly that Fannie Mae will stop insuring them from now on), why will prime quality mortgages escape the problems? Estimates are now emerging of a worsening in arrears rates in prime mortgages, at the same time that arrears on credit cards have ballooned for the likes American Express.
In fact, figures released last week by a company called LoanPerformance (it compiles and analyses residential mortgage figures) said the delinquency rate for prime mortgages rose sharply for those worth less than $417,000. That’s the cutoff for Fannie Mae and Freddie Mac insurance.
For prime mortgages under that figure the delinquency rate was 2.44% in May, compared with 1.38% in May 2007, while above $US417,000 the situation was worse with the delinquencies up to 4.03% of outstanding loans in May, compared with 1.11% a year earlier. And prime loans written last year are the worst performers of all.
This is bad news for banks and other mortgages groups as prime loans were thought to be the most creditworthy. Now they are starting to fail, more and more banks and other investors will have to start writing down the value of these loans and any associated credit derivatives. It could be just what the US banks didn’t want to hear.