US struggles to discover reasons to be thankful

Published on Saturday 28 November 2009 12:22

AS MILLIONS of Americans pick through the remains of Thanksgiving holiday feasts, many will also be searching for a few crumbs of financial comfort for which to be grateful.

Though the world's largest economy has emerged from the longest and deepest contraction since the Great Depression, figures released in the run-up to Thursday's traditional turkey-and-trimmings festivities drove home the fact that recovery will be anything but robust. It will more resemble the return leg of the holiday road trip that millions undertake today – a long, slow and stressful journey.

Brian Bethune, chief US economist at IHS Global Insight, expects "moderate sub-par growth" in the US for the rest of this year and much of the next, despite a few signs of slight improvement in areas such as consumer confidence, residential house prices and corporate profits.

"When a baby has been crawling for a while, and then it stands up and starts walking, what are the risks that it will fall? The odds are pretty high," says Bethune.

Last week the US Commerce Department confirmed that the American economy grew less quickly during the third quarter than previously estimated. The rise in GDP for the three months to the end of September was pared back from 3.5 per cent to just 2.8 per cent.

Though the downward revision was widely anticipated, it underlined expectations that the US will have to trudge its way out of recession.

Paul Ashworth, senior US economist at Capital Economics, says the revised GDP figures are not significant in themselves. "It doesn't change the underlying story – the economy was shrinking until some time towards the middle of this year, and now it is growing," he explains.

However, concerns remain. The Commerce Department estimated that federal spending rose by 8.3 per cent during the third quarter, contributing 0.7 percentage points to GDP. Ashworth and others are uneasy about what might lie in store when government spending is cut back.

"It is going to be a very long slog," says Ashworth, who expects unemployment to continue edging up from October's 10.2 per cent.

"It is not that unemployment will reach 10.5 per cent, but that it will not fall rapidly after that," he explains.

More than five and a half million people have lost their jobs in the US so far this year. Though the pace is easing, the latest forecasts from the Federal Reserve noted that an increasing number of those in employment were involuntarily working part-time.

Adding to consumers' discomfort is the ongoing fallout from the housing crisis. The Case-Shiller index, which measures house prices in the biggest US cities, rose by 0.3 per cent between August and September. Though this marked the fourth straight month of increases, the rise was weaker than those recorded during the summer. Compared with the same period a year earlier, house prices are still down by 9.4 per cent.

As a result, an estimated 23 per cent of US mortgage holders are now suffering negative equity on their properties, while nearly 10 per cent are said to be under threat of repossession.

Thus the ongoing gloom among consumers, whose collective disquiet remains stuck at levels last seen during the early 1980s.

Bethune at IHS says high unemployment and the accompanying lack of consumer demand make it tricky to predict when the recovery will gain enough momentum to fuel itself without government stimulus.

"There is really nothing to point at that is driving the bus right now," Bethune says. "It is just a very weak and sluggish recovery."

Ashworth says the next couple of quarters could be reasonably positive, with GDP growth of as much as 3 per cent. However, he expects that to slump back to about 1 per cent by the middle of next year. With joblessness remaining high, business investment weak and a "horrible" situation in the commercial property market, any easing in federal spending will quickly be felt.

"What happens after that? That is when growth will slow again," Ashworth says.

"I probably wouldn't go as far as to say that GDP will start contracting, but growth will slow down."