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What do you think?
Is the US economy double dipping?

25 June 2010


Here's some food for thought!

US housing

This week the US stock market halted its slight rebound and dropped again. The drop was in part prompted by US housing sales in May showing an unexpected decline. Unexpected? By whom? Economists apparently!

The decline should have been anticipated because the US housing market has been propped up by substantial US government subsidies. These end in June and home-buyers had to sign contracts by end of April.

Yet some economists had predicted housing would be up. The Financial Times said:

    Purchases of previously owned homes in the US fell unexpectedly in May as the expiration of government support sapped sales, adding to fears that the housing market could face a "double dip".

    Existing home sales fell by 2.2 per cent from April to May to an adjusted annual rate of 5.66m, according to the National Association of Realtors.

    Economists had predicted that they would rise by 6 per cent during the month and it marked a sharp turnround from April's 8 per cent increase. In spite of the monthly drop, sales are up by nearly 20 per cent from the same month a year ago.

    (By Alan Rappeport and Suzanne Kapner in New York, Published: June 23 2010 03:00)

It makes you wonder about economists sometimes. Of course house sales were going to be down in May, and further declines should be expected with the removal of the government's housing cash splash.

This housing crunch is just one reason why many believe that a US double dip into recession is inevitable and has in fact begun. The details of debt-induced financial problems in the US are truly startling. Have a look at this information.

US bank closures

The US forcibly closed 140 banks last year and 83 so far this year---all due to the mortgage market collapse. 775 banks are listed as 'problems', up from 702 last year.

And watch out for the US commercial real estate market. Go back to March this year and the video interview analysis by the head of the US Oversight Congressional Panel Elizabeth Warren. Listen to her warnings [at approx 16 min 40 sec mark] and think of what's unfolding now. Warren says that of the 8,000 US banks, 2,988 were excessively concentrated in commercial real estate loans. By the end of 2010, half of all commercial real estate loans will be under water. These banks know the impending problem and that many more banks will go under. Therefore they are holding on to money and will not lend. Watch out for a further increase in bank collapses.

US state and municipal governments

We've reported on some aspects of this issue before, but look at this. Thirty-two US states have been forced to borrow $37.8 billion from the Feds to cover their unemployment benefit payments. That sounds like insolvency. Here are some examples: This partly demonstrates why analysts forecast that a US municipality bond default is likely in 2010-11. This could be the US's equivalent of the Greek crisis for Europe.

Bizarre capitalism

It's become almost bizarre. After bailing out General Motors with a cash injection of $US50 billion, the US government now owns 60 per cent of GM (Government Motors). With tens of billions of dollars of GM's debt also wiped away, the company is producing a small profit. Now the United Automobile Workers (UAW) is seeking to return some of the employee benefits that were negotiated away when the company was structured out of debt. But it seems there's no need to worry about shareholder 'rip-off' because the majority shareholder is the US taxpayer. Now here's the extra twist on US capitalism: another major shareholder is the UAW.

Summary?

If you want to read an economist's argument that might pull all this together, here's one explanation that claims that the US is in a deflation spiral.