President Obama’s $US275 billion home loan foreclosure help package has won a better reception than last week’s banking bailout announcement, but the flow of news around it overnight made it seem all so irrelevant.

New house starts fell to an all time low, industrial production fell again last month to be down 10% in the past year, new home permits fell, but not by as much as new home starts. The Fed released, for the first time, detailed forecasts on growth, inflation and unemployment that had few silver linings.

The economic outlook for the first half of the year was downgraded, but the Fed still expects the first signs of a rebound to appear in the back half of 2009.

The Fed expects gross domestic product to decline by 0.5% to 1.3% this year, significantly worse than the October forecast of -0.2% to positive 1.1% growth. Unemployment is forecast to rise to 8.5% to 8.8%. GDP fell by 3.8% in the fourth quarter of 2008, and unemployment hit 7.6% last month, a 17 year high.

Like here in Australia, the Fed doesn’t expect any quick flow through to the US economy of the huge $US787 billion stimulus package signed into law this week by the President.

The mortgage plan is aimed at assisting up to 9 million families either refinance, or cut their home loan repayments.

The plan will allow up to 5m homeowners to refinance their mortgages. To qualify, homeowners must have taken out conforming loans owned or guaranteed through Fannie Mae or Freddie Mac which will get another $US200 billion. And $US 75 billion dollars will be used to help at-risk homeowners stuck in a negative equity trap (the value of their homes is exceeded by the amount owed on their mortgage, or negative equity).

This “stability initiative” will aim at helping up to 4 million people avoid being foreclosed on because they can’t afford to keep up repayments, or want to walk away and hand their homes back to banks, which in turns increases the level of foreclosure sales, and adds more downward pressure on house prices.

Compared with last year’s fluffing of the bank bailout package this was a far better-argued and received plan, but it was the other data releases that confirmed the growing suspicion that the current quarter could see even more misery and a deeper contraction than previously thought.

In fact the flow of figures vindicated the Fed’s post January meeting statement that:

“Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly,” the Fed said on January 28.

The December GDP numbers revealed a surprise rise in stocks of unsold goods, which if it is not worked out of the next estimate next week, means there’s more pressure on production and employment this quarter. Certainly the industrial production figures confirmed that with falls across the board.

The Fed last month was worried about the global slowdown worsening, which had cut demand for US exports, which in turn had caused output to fall. Certainly the news flow from outside the US got gloomier in the past fortnight. Growth figures for Japan, South Korea, Europe, Singapore, the UK and Eastern Europe have al; slumped; unemployment is climbing, trade levels are weak and retail sales are stagnant to falling in most major economies as consumers stop spending. Financial systems are still weak, though not as fraught as in October-December, but a new banking bust threatens Eastern Central and parts of western Europe.

US industrial production down 2% in January from December and was down 10% on the same month in 2008 (and falling at an annual rate of 21% over the past four months!). Car production fell a huge 23.5% in January as car companies closed factories, idled lines and sent workers on leave or sacked them. And that couldn’t keep up with the 37% slump in sales. Every category of production fell in January and compared with January 2008.

In a worrying move, the huge Goodyear Tire Company has revealed its second round of massive job cuts in six months: 5000 after 4000 were slashed in the closing months of 2008. Goodyear is one of a number of US car parts companies to have asked the Government for more than $US25 billion in assistance earlier this week, before General Motors and Chrysler put their hands up for another $US21.6 billion. When companies like Goodyear make a second attack on employment levels and costs you know they are hurting and the outlook is darkening by the day. As it is in the auto industry in America.

The fall in new home starts was the 7th in a row. They were down 16.8% from December, which was off 15% from November, which fell the same amount from October. Overall, new home starts are around 56% down on where they were in January, 2008. And it was only last August-September that some analysts were saying the housing sector was bottoming out, as they did again today with news that new building permits (which allow starts to happen in later months), fell by less than 5% last month from December. In fact the number of new permits (521,000 annual) was larger than the number of actual starts, (466,000) which got some analysts screaming “housing is bottoming out”, again.

New home starts were 466,000 in January, new home sales were 331,000 in December (when starts were above 500,000), so the backlog of more than a year’s unsold new homes is not going to allow a bottoming out for some months, at a minimum.


The Fed’s January minutes included a set of detailed short term (one year) and long term forecasts (out to 2011), and then for a further three years on top of those, making for six years in total.

The central bank also committed itself to a major breakthrough in monetary policy: it moved closer to an inflation target based around 2% a year (through its favourite measure the PCE price deflator) a year. The Fed joins countries like Australia, the UK, New Zealand and the 15 nation eurozone in having a stated inflation target over time.

“Most participants judged that a longer-run PCE inflation rate of 2 per cent would be consistent with the (Fed’s) dual mandate; others indicated that 1-1/2 or 1-3/4 per cent inflation would be appropriate,” it said.

Although inflation is not a problem at the moment, the Fed sees it not being a concern for some time in today’s forecasts, the adoption of the 2% target is a dramatic switch for the US central bank and a defeat for those around the world opposed to the concept of inflation targeting by central banks.

In fact the minutes reveal that the Fed had a special telephone meeting on January 16 to discuss the idea of moving to a target. No actual decision was made, but the tone of the minutes of that call and chairman Bernanke’s comments this morning make it clear that 2% is the figure that the Fed will now be using (over time, as with our Reserve Bank) to set monetary policy by. That’s when the enormous current pressures dissipate.

Fed chairman Ben Bernanke justified the idea of a target as a way of “anchoring” inflationary expectations around the level in from now on.

“Also, increased clarity about the FOMC’s views regarding longer-term inflation should help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low,” he said in a speech in Washington this morning, an hour before the Open Markets Committee minutes meeting were released with the new forecasts and discussion of inflation

“Many participants agreed that establishing and maintaining a transparent numerical inflation objective would be helpful — at least to some degree — in anchoring inflation expectations and thereby improve the overall effectiveness of monetary policy; others judged that the potential benefits of an explicit numerical inflation objective might be largely attained by extending the horizon of their regular projections for economic activity and inflation.”

Peter Fray

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