April 23 (actually the early morning of April 23 in Australia) is when we will get the March figures for US existing home sales.
They are again expected to be poor, just as next week’s pending new sales, and then actual new starts and issued permits, will make gloomy reading.
More and more US economists, brokers and others are now discounting the continuing slump and projecting a recovery later this year. US homebuilding shares are up 20% or more since January.
It’s a case of the gloom is gone, now for the rebound.
They are going to be disappointed: US house prices have to stop falling, and then stabilise, and US bank lending will have to stop contracting, before any recovery will happen. Around $US2.3 trillion was lent in 2007 for US homes, this year it will be less than $US1.5 trillion.
This week America’s biggest Savings Loan, Washington Mutual, was thrown a lifeline by private equity group, TPG. It injected or promised to invest a total of $US7 billion into Washington Mutual. Instead of taking control, it is taking a substantial minority stake: there are long time links between the two groups at board levels.
Washington Mutual said it lost $US1 billion in the first quarter (on early figures), after losing $US1.8 billion in the fourth quarter. This week it said it would close 186 offices, stop lending in more areas of the mortgage business and sack 31000 employees. It closed offices and sacked 3,000 employees only in December.
And in December it raised $US3.9 billion in new capital, it cut staff, costs, products and trimmed lending: and that was not enough.
So who says the US housing and financial sectors are through the pain yet?
To grow earnings, companies have to do more business, lend more money, build more houses, demand more pipes, bricks, wood and glass. That is not going to happen for a while. I don’t know when it will stop, but I do know that banks, brokers and most investors have seriously underestimated what is happening in the US and have been doing it for a year. So there is no reason to believe this talk of bottoming and things are looking up.
The Fed’s March 18 minutes talked about the US sliding into a first half recession, and then recovering slowly in the second half of the year. That’s the conventional thinking.
The International Monetary Fund this week took a far gloomier outlook. It sees the US in recession for this year, with growth of 0.5%, rising to 0.6% next year as the recovery starts ‘sometime in 2009’, according to the Fund’s World Economic Outlook. That implies a recession or sharp slowdown lasting the best part of a year.
It could be 2010, to 2011 before the US recovers to 2007’s GDP figure of 2.2%, which included the very strong third quarter.
The IMF last year underestimated the impact and extent of the subprime mortgage crisis and the way it would suck the rest of the US economy down, and spread across the world, having a disruptive impact. (And still having. German banking regulators allowed a small Bremen area bank to close its doors this week: around $US180 million in assets, it over-extended in commercial paper and no one wanted to buy it.)
Now the IMF is not very optimistic: too gloomy some might say, grimly realistic might be better.
The Fund believes the US slump will be much more protracted, though not necessarily very much deeper, than most economists are projecting at present.
It sees a credit squeeze in Europe as well as the US, which will cut growth and raise the risk of significant house price declines in some European economies as well.
(That’s the outlook certainly for Britain and Spain. The Bank of England cut its key rate overnight to 5 %.)
As said above, the Fed is looking for a rebound in the second half and above trend economic growth in 2009, implying growth rates of 3.5% to 3.0% on a year on year basis by the end of 2009.
The IMF says there will be no US recovery in the second half of this year, and economic activity will not begin to expand again until some time into next year.
What should cause analysts and investors to have second thoughts is the quite rational point the IMF makes, that many US commentators are simply ignoring.
The IMF believes America’s rebound next year and into 2010 will be “slow” compared with previous slumps simply because households and financial institutions will need time to rebuild balance sheets.
This strongly suggests a long period of soft consumer spending in the US. If that happens its bad news for retailing, consumer durables, exporters like Japan and China, US media companies, tourism, airlines, and some commodity prices.
The IMF sees the spillover of this lengthy period of underperformance hurting Europe and possible Asia, separate to the damage that could flow from a local version of the US housing slump and credit crunch.
Britain, Belgium, the Netherlands, Ireland, Spain and possibly France have been singled out as economies where the damage could be nasty.
The IMF reckons that bank credit contracts during recessions: its studies of past slowdowns have shown this, and there’s no reason to think this one will be any different.
