The US economy is in far worse shape than many in the US think, and is heading for a hard landing.
American consumers, who account for 70% of demand and consumption in the huge, $US14.4 trillion economy, are in trouble and cutting back spending, thanks to falling levels of credit.
In fact the credit cuts are now much deeper than anyone thought after the release of up to date figures.
The IMF said overnight that the US appeared to be sinking into a recession, it said.
The Fund said in its latest World Economic Outlook that the US was now poised to expand 1.6% this year and a bare 0.1% in 2009.
That was an increase of 0.3% and a decrease of 0.7%, respectively from the prior forecast just three months ago, in which the IMF had lifted its April WEO forecasts, citing improving economic conditions in the US.
That improvement for this year relates to the 2.8% rise in second quarter economic growth.
The estimates were made before the latest figures though on consumer borrowing which tell a story of US consumers cutting back, or being cut back on credit, the lifeblood of the economy.
Figures for September store sales from some major retailers overnight showed sluggish growth for most, with downturns for those selling more expensive products, such as department stores.
Wall Mart managed a 2.4% rise in same store sales, but that was less than forecast, discount bulk chains lost Costco did OK, but Target reported a 3% drop in comparable store sales.
JC Penny, the big department store chain reported a massive 12.4% drop in same store sales in September, far worse than expected.
But it’s no wonder after the Fed’s earlier report.
Figures Tuesday night from the Federal Reserve on consumer credit show the biggest fall in the history of the recorded figures.
At the same time major industrial, Alcoa, suffered a 52% drop in third quarter earnings and has joined the mighty General Electric in eliminating a share buyback to conserve capital.
The national body for US car dealers warned that 700 would go out of business this year alone, and more would follow in 2009, if the credit freeze was not eased soon. Car sales fell 27% last month and the way the credit freeze is working, that drop will increase in the coming quarter.
And in a dramatic move the Fed extended the boundaries of its ‘Lender of Last Resort’ understanding by supplanting temporarily the frozen $US1.6 trillion commercial paper market, the day to day lifeblood for American business activity.
At the same time Fed chairman, Ben Bernanke held out hopes for a rate cut, but said the US economy was heading into tougher times.
The Fed said it would set up a new Commercial Paper Funding Facility to buy three-month debt from banks and non-financial companies.
It’s probably one of its most important decisions because if this vital short term debt can’t be rolled over for US companies (end employers) when it falls due; the American economy will be crunched to a halt.
The move was desperately needed with figures showing that 28% of the market would fall due this week and a further 12% next week.
The Fed’s figures last Friday showed that in the week to last Wednesday, the market had already contracted $US215 billion in the past three weeks and virtually all new lending was being done overnight.
If that 28% to 40% of that huge amount can’t be rolled over, the US economy will be crunched by the end of October at the latest, so the Fed had to act.
Without the Fed’s move to being a sort of bank, the US economy will crunch to a complete halt in a matter of weeks, throwing hundreds of thousands of people out of work and setting off a domino chain of corporate failures across all sectors.
This freeze in the commercial paper market is why the likes of Alcoa and GE have cut their share buybacks and why Bank of America cut its dividend by 50% and is seeking to raise $US10 billion in new capital.
It has to support the acquisitions of Countrywide Financial Services and Merrill Lynch and the added burdens they will impose on its finances: but it is like all other banks and has cut lending across the board.,
But it’s clear consumers, the engine of the US economy, were being denied credit by banks and other lenders well before the eruption of this latest phase when the credit crunch turned to a freeze.
But there’s nothing the Fed can do immediately to ease the squeeze on consumers: each week tens of thousands of them are losing their jobs, their homes, having their pay cut and hours trimmed and are being denied credit at a rate not thought possible until the Fed released the credit figures for August, a month before the crisis worsened with the spate of failures and bailouts in the US starting with Lehman Brothers.
The Fed reported that consumer credit fell by $US7.9 billion in August, the biggest fall since the statistics began being collected in 1943, to $US2.58 trillion.
Bloomberg said that economists forecast an increase of $US5 billion in consumer credit during August, so the Fed’s report came as a complete shock to the market.
Total consumer borrowing dropped at a rate of 4.3% in August, the most since January 1998.
Revolving debt such as credit cards decreased by $US612 million during August and non-revolving debt, including auto loans, dropped by $US7.3 billion.
That fall was a month before the 27% plunge in US car sales last month, so it’s likely that consumer credit again fell sharply in September.
The news of the Fed’s move and the sharp contraction in consumer credit (one of the Fed’s ‘Key Economic Indicators’) makes it easier to understand the contents of a speech overnight by chairman, Ben Bernanke in which he painted a gloomy picture of the US economy.
He would have kn
