In the US it seems the Federal Reserve is concentrating on calming the markets and not really worried about an assessment of the crisis and progress to ease the strain. Certainly more politicians and bankers are calling the crisis ‘nearly over’: the latest being US Treasurer Secretary Hank Paulson.
But it won’t be over until ‘the fat lady sings’ and in this case, until the Fed says it’s over.
But the cause of the crunch will still be there: the still sliding US housing market, and all those subprime and other mortgages.
The Fed and the Bank of England, plus the European Central Bank, are still pumping in billions of dollars a day into money markets to maintain liquidity and confidence, so in that respect the crisis won’t be over until those taps are turned off.
If the Bank of England’s reasoning is believed, what is missing is a leader or a few, to start buying up these ‘mispriced’ securities and show some confidence.
That might be possible, but in an election year, and with a President who said he didn’t want to see mortgages bought from individuals because that would reward speculators?
And just who does President Bush think the Fed has spent the past nine months supporting? The profligates and speculators of Wall Street and Europe, the big banks and financial groups who brought us the subprime mess and economic slide.
So the Fed’s latest rate cut of 0.25% (to 2% for the Federal Funds rate) will be the last for a while, or will it. There was enough confusion around yesterday for the US dollar to rise, fall and trade sideways: no one could quite make the call.
Now the Fed can concentrate on the wider economy where it and the rest of American business seem bereft of any ideas, except the old standby, ‘When the going gets tough, go shopping’.
It’s going to be a big ask. The US economy is static; it grew at 0.6% in the March quarter, unchanged from December’s annual rate, but sharply down on the 4.9% ‘boom’ rate in the September three months.
Some in the US argue that this means the Fed has ‘stabilised’ the economy with rate cuts of 3.25% since last September and the way is now clear for a rebound.
And, the 0.6% figure for March was a bit better than the 0.5% forecast by most economists, so there were smiles all around until they started delving into the numbers and found some horrifying holes.
As a result some economists now assert the US is in recession because 1% of the actual raw growth figure came from a build up in unsold business inventories (0.8%) and a 0.2% contribution from a smaller trade deficit as exports rose 5.5% over the quarter and the trade deficit shrunk.
Consumer spending (or personal consumption expenditures) which is the largest part of GDP, rose by a small 1% in the first quarter, the weakest rate since the second quarter of 2001 and more than half the rate of 2.4% in the sluggish December quarter.
But economists broke that down and found that real final sales to domestic purchasers (which is all the goods bought by US consumers regardless of where they were produced and adjusted for the change in inventories), fell by 0.4%, the first fall since 1991.
In other words, stripping out the boost from the rise in unsold stocks of goods, actual purchases by consumers had the first fall in 17 years.
Now that’s serious and means Americans are now so fearful of the outlook, worried about their mortgages, the cost, foreclosures, their jobs and of course higher petrol prices, that they cut their spending for the first time in nearly two decades.
And these are the shock-hardened consumers with a fistful of tax dollars the Fed, the US Government and business expect to spend the US out of the slump!
But the situation gets worse. Residential fixed investment (or spending on new and existing homes) plunged 26.7% in the first quarter, the biggest fall so far.
That’s still the real US economic story, the black hole of the US economy which is sucking in everything around it and destroying demand, consumer confidence, house prices, retail sales, bank profits etc etc.
Business investment is suffering now: spending on equipment and other capital goods fell 2.5% in the quarter, a worry given that exports are booming.
That in itself is a sign business reckons it can’t make any profitable investments at the moment because demand is poor, the cost of funds is high and the outlook uncertain. Business spending rose 6% in the December quarter, so the slump in March is significant.
Overnight Friday we will get the April jobs numbers from the US: the March quarter saw around 240,000 people lose their jobs and expectations are for around 85,000 more to have been lost in April.
Petrol is at a record average of $US3.60 a gallon, and it’s not even the peak driving season months of July-August, when prices usually peak
America faces the very real prospect of the economy slumping into negative territory this quarter simply because of the depression in housing and the need by business to cut unsold stocks.
The tax rebate and the rise in unwanted stocks have come together unintentionally: a sort of mass clearance sale situation has evolved.
US businesses have all these unsold goods as they continued producing them in the March quarter, ignoring what was happening in the economy as housing, retail sales and business investment fell.
The first one off tax rebates started flowing to US taxpayers this week: an average $US900 per person, and around $US100 billion in the next six weeks or so.
So, naturally US retailers kicked off big advertising campaigns this week to try and grab some of those dollars with price cuts on essential foods like rice, cereals, luncheon meat, and of course plasma TVs and consumer entertainment. All p
