The beginning of the end

tauringhuang.

Jul 31st 2009
From Economist.com

New GDP figures suggest some hope for America’s economy. But the pain is far from over


FIGURES released by America’s Commerce Department on Friday July 31st confirmed what most had expected: America’s economy suffered yet another quarter of falling output in the three months to the end of June. The world’s largest economy shrank at an annual rate of 1% in the second quarter. At least as of June 30th, America’s economy was still contracting, thus the country's deepest post-war recession was not over.

But the news has been greeted with something approaching relief. For one thing, the decline was smaller than many economists had predicted, and a lot less than the dramatic 6.4% annual rate of contraction of the previous three-month period. For another, there are reasons to hope that conditions improved in July. And some newly released data about earlier months give reasons to cheer too.

These suggest that the decline in economic activity may have bottomed out at last. The S&P/Case-Shiller index of house prices in America’s 20 largest cities rose for the first time since July 2006 in May, by 0.5%. Americans also bought more houses in June than they did in May: sales of new single-family homes rose by 11%. All of this suggests things are getting brighter in the troubled housing market.

A sense of an end to the decline is also apparent from the Federal Reserve’s most recent “Beige Book”, a twice-quarterly publication in which the Fed sums up its assessment of the economy based on reports from its 12 constituent regional reserve banks. The latest, released on July 29th, indicates that activity has begun to stabilise, albeit at a low level.

All this may explain Barack Obama’s comment on Wednesday that America “may be seeing the beginning of the end of the recession”. Reaching a bottom does not mean a quick rebound in economic activity, however. The recovery is expected to be shallow and prolonged because American consumers, worried about unemployment and the collapse in the value of their homes, are seeking to reduce their debts, and thus will not spend as freely as once they did.

House prices still have a long way to go before they return to the level of a year ago (let alone to their peak). The Case-Shiller index may have risen in May but it remained 17.1% lower than a year earlier, when prices had already been falling for almost a year. Another concern is that the flexibility and mobility of America’s workforce, long a strength of the economy, is limited as long as Americans find themselves unable to move home because of negative equity (when the value of a house is less than the mortgage on it). The situation is likely to persist until prices recover more.

A greater worry is the bleeding in America’s labour market. Unemployment typically continues to rise even after GDP starts to increase, so pain for workers is far from over. Already 9.5% of the workforce is unemployed, and 144 of America’s 372 metropolitan areas reported unemployment rates of at least 10% in June. More jobless will probably mean less shopping and a slower recovery. The latest consumer-confidence numbers show that Americans are jittery: an index from the Conference Board, a research group, fell to 46.6 in July from 49.3 in June. The quarterly GDP report also makes it clear that consumer spending, which rose slightly in the first quarter, dropped again in the second, by 1.2%. The good news, therefore, was more a result of government stimulus than evidence of a real, sustainable recovery in private demand.

The Commerce Department has also revised its estimates of just how bad 2008 really was, saying on Friday that American GDP expanded at a mere 0.4% last year, much less than its earlier suggestion of 1.1%. This means that the economy will have to grow even more than earlier thought to recover to the level before the crisis. The beginning of the end may be in sight, but recovery is some way off.