US economic overview - September 1, 2006

General: The house that Alan built is crumbling. Housing data in the US point to a sharp downturn both in housing starts and housing sales. The Federal Reserve under Alan Greenspan facilitated the unprecedented boom in housing. Trying to save the economy after 9/11, the Federal Reserve cut the short-term lending rate in stages to a remarkable one percent and kept it there for an even more remarkable twelve months. Houses were built and bought in record numbers and home owners used the low interest rates to take out home equity loans which in turn fueled the voracious consumer spending that kept the US economy on an enviably high level. Now the housing market is overbuilt, values are dropping and home owners are struggling to make mortgage payments and/or service their home equity loans, and at the same time trying to put gas into their vehicles at ever rising costs. So is a recession inevitable? All the ingredients are there, but it could very well be a short and mild one. Or, there could be none at all. Some of the following data are not bad and could bear out what some pundits have referred to as the “Goldilocks” economy – not too hot and not too cold. Housing Starts: 1.795 million annual rate in July, the slowest pace for twenty years, or 13.3% below the rate of July 2005 Home Sales: fell 4.1% in July to a 6.33 million annual rate. Sales fell across the US; no regional market was spared. The median price in July was $230,000 just 0.9% over last year's level. Inventory of unsold homes has reached record levels. GDP: in its second of three estimates, the Department of Commerce revised economic growth for Q2 to 2.9% from the earlier reported 2.5% (5.6% in Q1). But pretax corporate profits increased only 3.2% from Q1, significantly lower than the 12.6% increase in Q1 from Q4 2005 Unemployment: 4.7% in August (4.8% in July, 5.0% a year ago), 128,000 non-farm jobs were added to non-farm payrolls in August, up from 121,000 in July Consumer Spending: + 0.8% in July, twice the pace of June Price Index for Personal Consumption Expenditure (PCE): the core PCE takes the volatile food and energy prices out of the equation. This core index, tightly watched by the Federal Reserve, grew by just 0.1% in July the slowest pace since December Retail Sales: + 3.4% in June Industrial Production: + 4.9% July (for the previous 12 months) The Institute for Supply and Management (ISM) reported that their manufacturing index rose to 54.7 in July from 53.8 in June. But there was also a faster increase in prices paid for orders of durable goods, designed to last three or more years, which rose 2.9% less than an earlier estimate of 3.1%. Orders for nondurable goods fell. Trade Balance: - $830.2 billion in June (latest twelve months) Current Account Balance: - $808.5 billion for Q2 (latest twelve months) By the way: China revised its GDP growth as well. The previous blistering pace of 9.9% for 2005 was changed to a red hot 10.2%. This announcement was made at about the same time that the International Monetary Fund (IMF) decided to let China have a greater say in policy matters (along with Turkey, Mexico and South Korea).