The US Economy

It is still hard to say exactly where, or at least at what pace, the US is heading, as I argued in this post back in January. The big issue is of course the long run future of the construction sector in the US. Despite the fact that the short term outlook may be for a more protracted slowdown, I am by no means pessimistic in this regard in the mid-term: simply one glance at the US median age (plus my intuition that with so many structural savers out there interest rates are more likely to trawl the bottom than not despite the best efforts of the central bankers) suggests to me that the US housing market will have life, and for many years to come. Demographics seem to guarantee that.

The current housing market situation does not look at all positive:

Builders broke ground on more homes last month, but permits issued for future homes plunged to their lowest level in a decade, in a sign that the housing slump may not yet be over....Building permits, seen as an indication of the housing sector’s future prospects, fell 8.9 per cent to 1.43m, missing expectations of 1.52m and down from a revised level of 1.57m in March. This was the biggest monthly drop in building permits in 17 years.


Bloomberg reports this morning that the extent of the slowdown in the first quarter may have been worse than initially recognised:

First-quarter U.S. economic growth, already reported as the weakest in four years, will be revised even lower as the trade deficit widened and businesses reined in inventories, economists said before a government report today.

The world's largest economy grew at an annual rate of 0.8 percent from January through March, down from the 1.3 percent pace estimated last month, new figures from the Commerce Department may show. The forecast is based on the median of 78 forecasts in a Bloomberg News survey.

Now this is only an estimate, and we need to wait for the Commerce Department report to be published, but again, anecdotal reports like the data for remittances and migrant apprehensions cited yesterday do offer some confirmation that in the short run growth is unlikely to accelerate dramatically.

Really - as always in the US - spending seems to be the key:

A gain in consumer spending last quarter was one of the few things that kept the expansion alive. Spending, which accounts for about 70 percent of the economy, may be revised up to 4.1 percent in today's report, from an initial estimate of 3.8 percent, according to the median forecast in the Bloomberg survey.

and while we may not seen this rate of increase being sustained into the future, I see no good reason to anticipate a dramatic drop at this stage.

Another reason to be cautiously positive is the fact that the economy has been holding *without* the Fed taking recourse to rate reductions. Their ability to keep their hands off the tiller has certainly surprised me, but it should always be borne in mind that this capacity is still there, as and when the need arises. Indeed, at the present time they seem to be just as preoccupied by the US inflation path as they are about the likelihood of an imminent drop into recession:

Federal Reserve Chairman Ben S. Bernanke is pulled in opposite directions by worries over inflation and housing, leaving him little choice other than to keep interest rates unchanged.

Fed officials said they still expect a pickup in the economy this year and view inflation as their main concern, minutes of their May 9 meeting showed yesterday. They listed several caveats, including the risk that the housing recession may ``weigh heavily'' on growth.

Still, officials said the risks of a slowdown have ``diminished slightly.'' Futures trading indicates the chance of a rate cut by the end of December has dropped to 40 percent, the lowest this year. As recently as March, investors saw a half- point reduction as certain.

``If you don't quite understand how the economy's functioning, then there's a temptation to take the view that anything you do to interfere could turn out to be perverse,'' said Neal Soss, chief economist at Credit Suisse in New York, who was an adviser to former Fed Chairman Paul Volcker. ``Therefore, you're better off doing nothing.'

I cerainly like that last point: "If you don't quite understand how the economy's functioning, then there's a temptation to take the view that anything you do to interfere could turn out to be perverse". I think this is where we are, until we get a better measure of just why this present wave of global growth is so strong and so sustained it would, IMHO, be foolish to start jumping to any hasty, and possibly rash, conclusions. Thus - when in doubt "you're probably better off doing nothing". Would that other participants in the economic community could understand the force of this basic but subtle point.


Update

In the end the Commerce Department report showed US first quarter growth to be slightly worse than expected this morning: a 0.6% annual rate.

The U.S. economy grew last quarter at a 0.6 percent annual rate, the weakest in more than four years, as housing slumped, the trade deficit widened and businesses reduced inventories.
Bloomberg

In response to a question in comments I did some digging around, and came up with this chart from the Commerce Department.



Now basically this makes the position pretty clear, in the short run the decline in housing has been met by an increase in personal consumption, since the percentage changes in GDP (in opposite directions) more or less cancel out. What has happened is that growth has slowed and consumption maintained its path, so the % of GDP has naturally risen (at least that's my off the cuff reading).

Basically the consumer is hanging in, taking a longer view, and waiting for housing to pick up again. Will it? That is the big question, or better put, when will it? And can the consumer hold out till then?