Easy credit gone and jobless queues rising
By Anne Davies, Washington Correspondent | smh.com.au | 21 September
A vehicle outside a dealership in Michigan advertises the "cash for clunkers" rebate.
Even in the affluent US capital, a city that's been relatively insulated from the worst recession since Great Depression, the beggars are visible.
They sleep on the street just a block from the White House and at big intersections they wait for fellow Americans to come to a standstill and spare a dollar or two.
Many carry signs telling their story: laid off, returned Iraq vet, lost the house and the job, got sick and no health care.
A year after the US financial markets went into a tailspin, the US economy is showing tentative signs of a weak recovery but jobless numbers are continuing to rise, though not at the terrifying rate of six months ago, when 600,000 people a month were joining the unemployment lines.
Something else has happened in America as well. The era of easy credit which fuelled two decades of mostly spectacular growth is over, and it's not just on Wall Street.
The American consumer has started saving. Mortgages, personal loans and even credit cards are harder to get, as the official statistics attest. Consumer credit was down 5.2 per cent annualised between April and June.
Revolving credit, which includes credit cards, was down 9 per cent. As a result, the turbo-charged consumer market that has powered the American economy since the 1980s has run out of puff.
These combined factors – and they are related, because people don't spend if they fear for their jobs – are likely to define the trajectory of the US recovery. It will be slow and painful.
The jobless rate rose to 9.7 per cent in August and is expected to peak above 10 per cent in the months ahead. It's already there in at least 15 states and some economists predict it could be five years before the US economy generates enough jobs to overcome those lost and to employ the new workers entering the labour force.
This fear of job losses is likely to keep consumers' wallets in their pockets. Without a return to spending – retail sales make up 70 per cent of the US economy – it seems inevitable that the recovery will be slower than in the past.
So what are the positives? Retail sales have shown signs of improvement and the Federal Government's stimulus package is working its way into the economy.
Retail sales in August were up 2.7 per cent, the biggest jump since January 2006, mainly due to the runaway success of the Administration's "cash for clunkers" scheme which paid people up to $US4500 ($5180) to trade in their old gas guzzlers.
Auto sales were up 11.9 per cent in August, a big boost after the car makers saw sales plummet as much as 40 per cent on an annualised basis.
Excluding sales of vehicles, retail sales were up 1.1 per cent, compared with a 0.6 per cent decrease in July, but most analysts are being cautious about popping the champagne corks too early, warning that part of this boost was due to higher petrol prices at convenience stores, preferring to wait to see a stronger spending trend emerge.
In the housing market – the area of the US economy that helped spark the crisis – there are tentative signs of stabilisation, but again they are fragile.
The number of home foreclosures dipped slightly in August from July, but they are still running levels that are 18 per cent above a year ago.
In Nevada, the state with the highest foreclosure rate, one in every 62 houses is in foreclosure. There's also been some positive news on home prices. The Case-Shiller Index has shown increases for May and June after 37 months of decline.
The number of home sales has risen too. '”The only doubts about it are the market is rather abnormal now with all these foreclosure sales,” Robert Shiller, who helped develop the index, said.
The huge falls in house prices – in some markets it is as much as 50 per cent – means that many Americans (perhaps as many as one-quarter of those with mortgages) owe more on their homes than they are worth and so their feelings of wealth have been battered.
The slow recovery will be the major political and economic problem facing the Obama Administration in the next two years. The midterm elections for Congress are in November 2010 and the next presidential race gets under way in late 2011, which leaves only a small window for a recovery.
The Administration's ability to stimulate the economy further is also severely curtailed by its huge budget deficits and a Congress that has run out of patience with financial bail-outs. Indeed many Republicans are calling for an early end to the stimulus to tackle the deficit.
“I don't think we are out of the woods yet,” the President, Barack Obama, said last week. “We need to be careful about taking the crutches away from the patient too early.”
He cited the experience in the Great Depression when fears of inflation prompted policymakers to wind back on job programs too early, prompting another deep recession.
The slow recovery of the US will have implications worldwide. China has grown into a manufacturing behemoth making cheap goods for US consumers, and Australia has sold them the commodities and energy to power their factories.
The pace of a US recovery will affect us all and while so many Americans remain unemployed, those on the street corners begging are a salutary reminder that the future is still uncertain.
First published by Smh.com.au on September 21 2009
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