A statistical recovery - or a genuine one?

Business Times - 25 Aug 2009

A statistical recovery - or a genuine one?

The upbeat mood of central bankers and Wall St investors isn't trickling down to Main Street


US FEDERAL Reserve chairman Ben Bernanke and other central bankers meeting at the annual Federal Reserve symposium in Jackson Hole, Wyoming last week seemed to be exuding a sense of optimism about the condition of the American and global economy (see opposite page).

Indeed, Mr Bernanke insisted in a speech that the American economy was starting to emerge from recession and aggressive intervention by Washington was working.

'After contracting sharply over the past year, economic activity appears to be levelling out both in the United States and abroad, and the prospects for a return to growth in the near term appear good,' he said. But he did temper that upbeat attitude by cautioning businesses and consumers that problems would continue to persist in both the credit and job markets.

Mr Bernanke also seemed to suggest that one of the reasons for the economic recession had to do with the psychology of the markets, noting that 'the events of last September and October exhibited some features of a classic panic'.

It sounded as though the Fed chairman was seeing some reasons for a sense that the worst may well be getting behind us.

But on another level, Mr Bernanke was probably hoping that sending an optimistic message would have a psychological effect, producing a virtuous circle in which consumers and investors were encouraged to look more optimistically to the economic future, and as a result would start spending and investing. And that, in turn, would accelerate economic growth and ignite even more optimism about the economy.

And, indeed, the stock markets' response to Mr Bernanke's comments was bullish. The Dow Jones gained close to 156 points, jumping to 9,506 last Friday, while the Nasdaq climbed 31 points, ending the day below 2,021. Overall, the Dow was up 2 per cent and Nasdaq was 1.8 per cent up last week.

Moreover, on the same day that Mr Bernanke was delivering his address, the US government reported that sales of existing homes jumped more than 7 per cent from June and rose more than 5 per cent from a year ago. The National Association of Realtors disclosed that sales of existing homes were up for the fourth consecutive month, suggesting that buyers were taking advantage of falling prices, low interest rates and tax credits on bank-owned homes.

White House spokesman Robert Gibbs tried to put the economic news in a broader perspective, tempering general optimism about the economy with concern about unemployment.

'It does appear that the housing market is bottoming out a bit, which obviously was one of the reasons we got into the severity of the economic downturn that we're in now,' Mr Gibbs said, explaining that President Barack Obama was 'pleased with the fact that it appears we're making some progress in stabilising the economy, as I've talked about, but won't be satisfied until we get the economy fully back on track and that we're growing the economy in a way that creates jobs for the millions of Americans who continue to look for work and thus far can't find it'.

Indeed, while central bankers and investors on Wall Street may be cheerful, that upbeat sentiment has failed to trickle down to Main Street. In fact, one of the main reasons why home prices are continuing to drop is the rising number of foreclosed homes that are being put on the market.

That means that a growing number of Americans are continuing to lose their homes. The expectation is that the number of home foreclosures will rise in the coming months, reaching an all-time high. The increase in home sales in July, which was higher than expected, suggests that some momentum is building up in real estate markets that is driven in part by the falling prices of homes in states like California and Nevada.

At the same time, there are not a lot of bright spots in the unemployment figures. The weekly jobless numbers released last Thursday pointed to a rise in new claims for unemployment assistance.

State-by-state analysis showed that 26 states experienced rising jobless rates last month, while 17 states (and the District of Columbia) - including the economically struggling Michigan - saw their unemployment figures fall in July.

That Michigan was adding employment reflected a slight comeback in the auto sector, mostly as a result of the so-called US$3 billion 'Cash for Clunkers' programme under which car buyers could receive rebates of US$3,500 to US$4,500 for trading in older vehicles for new, more fuel-efficient models. But after its funding runs out, the popular programme is scheduled to end this week.

But most projections, including those by the Fed, suggest that the unemployment rate is going to continue to rise and remain around 10 per cent for quite a while, and start falling only in 2012 and beyond.

And while there is hope in Washington and on Wall Street that the economic recovery in Asia and Europe could increase global demand for American exports, there is also a growing concern about the continuing expansion of the federal deficit due to the fiscal measures adopted by Washington in response to the economic recession.

Indeed, the economic recovery has been driven in part by the economic stimulus package, the Cash for Clunkers programme and the homebuyers' tax credit, all of which meant more government spending and a rising fiscal deficit - which could end up retarding the recovery in the long run.

Adding to the sense of economic uncertainty is the recognition that American consumers are not rushing to the shopping malls to spend their money - mainly because they don't have a lot of money.

As long as housing prices continue to remain at their current lows, Americans who have seen the value of their homes fall (a large segment of the American middle class) - and are still experiencing a credit squeeze and an uncertainty about their jobs - are not going to serve as the main engine of an economic recovery.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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