Is a US recession inevitable – MoneyWeek

Let’sstartwithhousing。

Thefinancialheadlinespickeduponaprofessedbounceinnewhomesales,up5。

3%to1。

075m。

Therealestatelobbyhailedthisastheevidencethatthemarketisbottoming。

Well,theywould,wouldn’tthey?

Exceptthatthere’safewproblemswiththatstory…

Oneisthattheseslightly-risingsaleswereaccompaniedbya9。

3%month-on-monthdropinthemedianprice。

Inotherwords,buildersareholdingafiresale–slashingpricetagstotrytocleartheirinventories。

That’snotgenerallythesignofamarketthat’sabouttoturnaround。

Year-on-year,pricesweredown9。

7%,thebiggestdropsinceDecember1970。

(Salesweredown14。

2%year-on-year)。

Fromwhatweread,thatprobablyunderstatestheextentofthepricecuts,assomebuilderincentivesaren’tcountedascuts。

It’salsoworthnotingthatthesalesnumbersaresubjecttoheavyrevisioninsubsequentmonths,partlyasaresultofbuyersbackingoutofcontracts。

Julyfirstcameinat1。

075m;thelatestrevisionputitat0。

984m。

Augustwasinitiallyestimatedat1。

05m,nowit’sdownto1。

021m。

Soeventhebouncereportedmaybeoptimistic。

Existinghomesalesweren’tanybettereither,aswereportedonThursday。

Salesweredown14。

2%year-on-year,whilemedianpricesfell2。

5%,thelargestdeclineeverrecorded。

Andthere’severyprospectthatthisroutthathasbarelystarted。

Historically,theaftermathofahousingboomintheUSseestheshareofhousinginGDPdroptoaround3。

5%-4%ofGDP。

Presentlyit’s5。

7%fromapeakof6。

3%lastyear,soifthepatternholdstruewe’reonlyaroundone-quarterofthewaythroughthisbust。

Meanwhile,thefirstestimateofthirdquarterGDPgrowthcameinat1。

6%annualised,belowconsensusestimatesof2%。

Unsurprisingly,themainweaknesswasinthehousingmarket;residentialinvestmentdropped17。

4%inthethirdquarter,knocking1。

1%offgrowth。

Therewerepositives。

Businessinvestmentwasupstrongly,whilethedoughtyUSconsumerisstillshoppinguntil(s)hedrops,withconsumptiongrowthup3。

1%inQ3from2。

6%inQ2。

Thesetwosectorswillbecrucialtotheeconomygoingforward,becausemanyleadingindicatorsarenowpointingtowardsrecessioninmid-late2007。

Ifthat’stobeaverted,consumptionwillhavetostaystrongandbusinessinvestmentwillhavetopickuptheslackleftbythehousingslump。

That’snotimpossible,butthingswillhavetogetbetterfromhere。

Consumersbenefitedfromlowerfuelpriceslastquarter;unlessoilrocketsagainthatshouldhelpthemthisquarteraswell。

ButtheUSshopperisheavilydependentontherisingvalueoftheirhouses,bothbecausetheyusetheirhousesascashmachinesviamortgageequitywithdrawalandbecausesimplyhavingavaluableassetmakesthemfeelmoresecureandmorereadytospend。

Withthehousingmarketslumping,it’shardtoseehowconsumptionwillcontinuetostrengthenunlesswagespickupverystrongly。

Asyetthatdoesn’tseemtobehappening–thebiggainsinwageshavebeenduetostockoptionsatthetopendoftheincomescale。

JoeWorkerinmanufacturinghasbeenseeinghiswagesfallinrealterms。

ThecollapseofAmericanconsumershasbeenprophesiedmanytimesbefore。

Eachtime,they’vesurprisedwiththeirstrength。

Butonedaythisdebt-drivenconsumptioncyclewillunravelandnowseemsaslikelyatimeasever。

Meanwhile,businessinvestmentmaynotbestrongenoughtotakethestrain。

Optimistshopethatthecommercialconstructionmarketwilltakeoverfromtheresidentialone,butthe14%gainincommercialconstructioninthethirdquarterwasdownfrom20。

3%inthesecondquarter。

Onthefactonit,commercial,whilestillstrong,isslowingevenasresidentialworsens。

Andspendingonequipmentandsoftware–ahealthy6。

8%gainthistime–maynotbesustained。

Agooddealofinvestmentininformationtechnologyislikelytobedeferreduntillate2007asbuyerswaitforthereleaseofMicrosoft’snewVistaoperatingsystem(thereplacementforWindows)。

OneofthefewanalystsforecastinganoutrightrecessionisNourielRoubiniofNewYorkUniversity。

Hemakesagoodpointaboutbusinessspending’sfailuretotakeoff:“Thecorporatesectormaybeflushwithliquidityandprofitslikeneverbeforebut,insteadofinvesting,itisgivingbacktoshareholdersthiscashinthebiggestsharebuybackbonanzainUShistory($400bnin2005and$600bnin2006)。



“NocorporationwouldgivebacktoshareholdersitsprofitsatthisunprecedentedrateifithadgoodinvestmentorMAprospect;thesharebuybackbonanzaisthestrongestsignalofthepessimisticexpectationsofthecorporatesector。



Isrecessionacertainty?

Notnecessarily。

Asmentionedalready,theUSeconomyhasoftenprovenmoreresilientthanexpectedinthepast。

Andifaseveredownturnbeginstolooklikearealrisk,theFedwillcutratesaggressivelyinabidtokeepthingsafloatonaseaofcheapmoney。

Butit’smorethanapossibility。

Takenocomfortfromthefactthatalmostnoanalystsarepredictingit;theyhavealousyrecordwhenitcomestospottingtippingpoints。

Fornow,wefeelsaferinourunfashionable,bearishuniverse。