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Wednesday, November 15, 2006

The US Slowdown Contd.

There is more evidence that the US economy is holding to its slower rate of economic growth and that the housing weakness continues:

Home Depot said weakening in the US housing market had come "faster and deeper" than expected and warned that the slowdown would continue next year.

Bob Nardelli, chief executive, said softening in the housing market had caused "significant" deterioration in home improvement sales, with conditions likely to worsen further.

"I would say we haven't, within the home improvement part of this business, seen the bottom yet and I do not see anything that says it's going to get significantly better in 2007," he told investors.

The comments came as America's second-largest retailer announced a 3 per cent drop in third-quarter net profits and lowered its full-year earnings guidance.

Mr?Nardelli?said?a slump in new home construction had reduced sales to builders and tradesmen, while stagnating house prices were deterring consumers from investing in "big ticket" items such as kitchens and carpets.

The FT has a further article in a similar vein:

The latest US retail sales figures, from October, showed that consumer spending remained resilient in spite of the pressures from the housing market. Sales excluding petrol increased by 0.4 per cent over the month. Lower oil prices meant the value of total retail spending fell 0.2 per cent on the previous month.

But downward revisions to the previous two months' retail sales suggested that consumer spending was weaker than thought.

Drew Matus, a senior economist at Lehman Brothers, said: "The retail picture points to a slightly lower growth profile than we anticipated."

The key point would seem to be that retail sales are not benefiting from the reduction in gasoline prices to anything like the extent that some had hoped. Another warning signal came from yesterday's producer price index:

U.S. producer prices took their sharpest tumble in October since a matching record drop five years ago, influenced by cheaper energy that also sapped retail sales and showed a softening pace of economic activity.

A Labor Department report on Tuesday said its
Producer Price Index (PPI) that measures prices at the factory and farm level dropped 1.6 percent. It matched a record fall in October 2001 and was three times the decline Wall Street analysts had predicted.

Core producer prices excluding food and energy fell 0.9 percent, the biggest fall since a 1.2 percent decline in August 1993.

Meanwhile, the
Commerce Department said overall retail sales weakened by 0.2 percent in October after a 0.8 percent fall in September. It was partly because consumers were spending less on gasoline but any drop in consumer spending, which fuels two thirds of U.S. economic activity, makes financial markets wary.

"These numbers are the latest indication that the U.S. economy is slowing and that inflation is in fact decelerating," said Mark Meadows, a currency strategist with Tempus Consulting in Washington.

Now at this point I think it is important to stress that the US economy need to grow at a rate of something over 2% (cruising speed) just to maintain price stability. Any sustained period of growth below this level will inevitably put *downward* pressure on prices given the current global environment and events in China (see last post) will only add to this problem. So we might see a very adroit bit of footwork from the Federal reserve in the not too distant future, with market expectations being shifted towards the disinflationary (rather than the inflationary) danger. Lets just hope that this news reaches the ECB in Frankfurt before something seriously problematic happens in Geramny.

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