Housing Slump Likely to Prolong US Economic Slowdown
Now that four out of five economists believe the US economy is or soon will be in recession, the focus is turning to how deep and how long.
OECD economist Jørgen Elmeskov is not quite ready to call the recession official but says “the US economy is now essentially moving sideways, if not contracting outright.”
It may be premature to declare a recession, but with the pace of activity so far below potential, economic slack is widening rapidly.
In an interim assessment released today the OECD puts US GDP growth at 0.1% (+/- 0.4%) in the current quarter and at zero (+/- 0.5%) in the second quarter.
Elmeskov says “How macroeconomic policies should react is contingent on the outlook for activity and inflation beyond the near-term projection horizon as well as on the balance of several risks.”
- First, oil and other commodity prices may continue to rise for some time from their already high levels, despite slowing activity.
- Second, the extent of any financial turbulence and the magnitude and duration of the restraint exerted on economic activity by banks’ and investors’ newfound prudence, and by their need to recapitalise, is unclear.
- Third, short-run trade-offs between inflation and output may have changed in recent years, casting some doubts on the exact extent to which subdued growth will moderate inflation pressures.
In this light, the case for policy stimulus is stronger in the United States than in Europe or Japan and both US monetary and fiscal policymakers have already acted forcefully.
“In the euro area, by contrast, the near-term outlook for activity and inflation does not point to a need for stimulus and automatic fiscal stabilisers will provide more support than in other regions. In Japan, there is limited scope for responding to greater weakness.”
Elmeskov nots that the residential real estate slump in the US has been subtracting around one percentage point from annual real GDP growth over the past two years and will continue to do so this year.
Picking up on this theme, Lex in the FT thinks the real estate swoon will help keep the US in a recession for longer than the 2001 dip. Lex notes that the recent expansion was largely asset-based. “The ratio of household real estate assets to gross domestic product was pretty flat through the 1960s and 1970s. It rose in the 1980s but has surged since 1997. As wages have stagnated, and the cost of staples such as fuel, food and healthcare has risen, so many households have run down savings and cashed in on inflated assets, primarily homes – raising leverage – to keep increasing consumption.”
“US consumers – whose spending accounts for 70 per cent of GDP – therefore, enter this recession with a conspicuous lack of financial insulation. Rebuilding their balance sheets will hurt consumption, cutting into profits and possibly restraining companies’ capital spending plans. In any case, corporate investment, at 11 per cent of GDP, would struggle to fully offset sclerotic consumption. ”
A brief, shallow dip along the lines of 2001 looks like wishful thinking.
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