Another day, another statistic, speech and interview, all of which again underlined what Fed chairman Ben Bernanke said at the start of the week and earlier this month and right back to March: that the US economic recovery is fragile, facing significant headwinds, such as high unemployment, depends on government spending being maintained, meaning interest rates remain low for “an extended period of time”.
President Obama observed in a rare interview with Fox News in Beijing towards the end of his current Asian trip that the US economy could stumble into a “double-dip recession” early next year if government spending wasn’t brought under control.
“It is important though to recognise if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession,” the President said.
His comments came a day after the US federal government debt was reported to have climbed over $US12 trillion ($A12.8 trillion), on its way to the current debt ceiling of $US12.014 trillion, which should be reached some time next week.
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That will force Congress to lift the ceiling, or engage in a bruising brawl with the President that could see the government shut down. It could also lead the Obama administration to produce the toughest Budget in a decade early next year with massive spending cuts, a move that would also enrage some in Congress, especially with the health-care changes (and their huge bill), about to enter vital voting periods in the Senate.
The Federal debt is up more than $US2 trillion since September 2008, the end of the 2008 financial year and when Lehman Brothers failed. Much of the increase has come from a sharp drop in tax revenues and the spending on stimulus packages totalling $US780 billion, the Tarp money to rescue the banks and car companies (and other groups) of about $700 billion and spending on defence for the wars in Iraq and Afghanistan.
How he can cut government spending and not damage the still-needed stimulus boost will be a feat of financial ledgermain worthy of a Goldman Sachs.
But if there was just one stat that best illustrated the current fragility of the US economic “recovery” it was the October housing starts, which revealed a very surprising 10.6% drop from September as builders couldn’t get finance and private buyers withdrew because of doubt about the longevity of a housing tax break.
That break has boosted demand for new and existing houses, and helped turn around the plunge in prices across the country, leading many economists, politicians and investors to argue that the great American housing rout was over. It has been extended in 2010 and widened and it needed to be, judging by the sharp fall in starts and the 4% fall in approvals (called permits in the US).
Construction of new homes hit a six-month low in October and were 30.6% under the already depressed October, 2008 level.
At the same time a surge in the cost of new and used vehicles lifted consumer prices, proving that while the cash for clunkers helped boost demand, it actually allowed car companies and retailers to lift their prices and profit margins, an outcome that wasn’t even acknowledged by the idea’s boosters.
The housing and inflation figures came a day after a surprise slowing in industrial output in October, adding to the growing suspicion that the economy may have hit a bump after the move out of recession in the third quarter.
The Commerce Department said housing starts fell 10.6% to an annual rate of 529,000 units, the lowest since April. It was the biggest decline in 10 months. Starts for single-family homes fell 6.8% last month to an annual rate of 476,000 units, the lowest since May. Starts for the volatile multifamily segment tumbled 34.6% to a 53,000 annual rate, adding to September’s fall and a direct result of the downturn in commercial real estate that is hurting banks large and small across America.
Even though there are hundreds of thousands of homes and apartments vacant through foreclosures and people walking away, the US still needs a strong program of home unit building. But due to the banks cutting lending and then being hit with souring commercial real estate loans, this is not happening. If it not stopped, the collapse in this side of the housing market could drag the entire sector back under early next year.
And then a Fed member did something no one has done so far: suggested a time limit for that phrase used by his chairman and the Fed; that interest rates will remain at their current record lows “for an extended period of time”.
St Louis Federal Reserve Bank president James Bullard said in a speech overnight that experience suggests the Fed may not start to raise interest rates until early 2012. But he tempered this by saying the emerging concern borrowing costs have stayed “too low for too long” may prompt an earlier rate hike.
“If you look at the last two recessions, in each case the FOMC waited two-and-a-half to three years before we started our tightening campaign,” Bullard said. “If we took that as a benchmark, that would put us in the first half of 2012.”
Bullard added that in the debate on when to tighten policy, “the idea that you might be creating asset bubbles by keeping rates too low for too long will be an important argument”.
But offsetting this was the fact this recession is far deeper than the previous two, with unemployment at its higher level in 26 years and expected to rise further from the October level of 10.2%.
Bullard said his 2012 outlook assumes the most recent recession ended this summer, and that the FOMC, as in the past, will begin to raise rates about two-and-a-half to three years after a return to growth. That happened in the September quarter, to the Fed could start lifting rates in the front half of 2011.
So if rates remain about current levels for the next two to three years, what’s that say about the prospects for the overall economy, given the debt burden, weak banks and the unemployment problem?