Stephen Boyle: Green shoots are seen by rose-tinted spectacle wearers

WHEN Richard Nixon was running for re-election in 1972, he claimed as an economic policy success the fact that the rate of increase of inflation was falling. Looking at the green shoots industry in the US today, we haven't made much progress.

The range of backward and forward-looking indicators published in the last couple of weeks has generally been viewed by commentators through an optimistic prism. Yet all that can be said with confidence is that conditions are still deteriorating, but in some cases more slowly. We're back in Nixon territory again.

I remain firmly of the view that the US economy will continue to decline through the first half of this year, show signs of stabilisation towards the end of the year, before beginning a slow and possibly protracted recovery in 2010.

The optimists point to the fact that much of the 6%-plus annualised fall in GDP in the first quarter of 2009 came from firms running down inventories and that there was a bounce in consumer spending. Relying on the consumer to generate a sustained recovery lies somewhere between a fond hope and whistling in the wind. Such is the extent of household debt in the US that consumers' priority will be to repay debt, not to spend. What we saw in the first quarter was a jolt to the system from the massive monetary and fiscal injection that has been administered.

On inventories, the GDP numbers will certainly show some improvement when stocks have been fully exhausted and firms have to start producing again. But the recent Institute of Supply Management (ISM) survey showed that stocks were cut very sharply again in April and that firms remain uncomfortable with their stock levels.

It is easy to see why: they are concerned about the outlook for demand. Disposable incomes are flat or falling: private sector compensation increased by 0.2% in the first quarter, the lowest on record. Unemployment has been rising at more than 500,000 per month. The continuing contraction in output implied by the ISM means that unemployment will rise for some time yet. Consensus forecasts have unemployment peaking at 9.6% next year, up from 4.6% in 2007.

Against this background, it is hardly surprising that the Conference Board's survey of consumer confidence in April stood at 40 versus its long-run average of nearly 100. It remains lower than at the troughs of the recessions in the 70s, 80s and 90s.

A further reason for caution about an imminent return of consumption growth lies in the income distribution in the US. The wealthiest 20% of households earn half of all incomes and account for 40% of consumption. Their consumption spending is greater than the lowest 60% of income earners combined.

So what happens to their incomes and wealth is critical to the prospects for economy-wide demand. In recent years income growth for the best-off has come from rising wages and job growth, investment income and increased housing wealth.

Each of these is in retreat. Employment in financial services now stands more than 6 per cent below its peak. Over 100,000 finance jobs have gone since the start of this year. As corporate profits have collapsed, dividend income fell 8 per cent on a year earlier in the first quarter, the biggest decline in more than 20 years. House prices have fallen by more than 40% since they first started to wobble in mid-2006. They have further to fall before hitting the floor.

What's more, this segment of the population is also the most heavily indebted and faces the imperative to de-leverage in the face of falling asset prices. They will also be in the front line of the increases in taxes needed to restore the public finances to health in the medium term.

Against that backdrop, a resumption of consumption growth among the very people on whom consumption growth has most depended seems a distant prospect. Signs of this squeeze on high earners is evident in the performance of upscale retailers such as Saks and Neiman Marcus, which are faring poorly.

These are some of the reasons why things getting worse more slowly should not be confused with improvement in the US. I am not a follower of Gardeners' Question Time, but people who think they're seeing green shoots may actually be looking at weeds.

Stephen Boyle is head of group economics at Royal Bank of Scotland