A sobering look at the US Economy

An interesting article on the state of and outlook for the US economy from Hoisington Investment Management. The key points for those with short attention spans:

• Whilst GDP improved in 2Q07, driven mainly by restocking of inventories, the underlying fundamentals of the economy deteriorated.
  

• Personal consumption has been flat for the past 4 months signaling that a softening labor market and lower income growth coupled with falling home prices and tighter lending standards are starting to take their toll on consumers.

• The employment picture is not as rosy as the offical figures suggest. Non-farm household employment, an alternative jobs measure that historically has been more accurate at cyclical turning points, expanded 45,000 per month this year compared to a 235,000 average monthly gain in 2006, an 80% decline.

• Equity extraction from homes between 2002 and 2006 that accounted for 45% of the rise in total personal consumption expenditure has largely dried up since home prices are no longer rising, and credit standards have been tightened.

• By now you know all the stats on housing. Home prices are deflating in 3/4 of the US's individual markets. In the past year, home prices decreased 2.7%, the steepest decline in 16 years, NAHB index at 16 year lows. Delinquincies at the highest level since 2001.

• Strong global growth is not enough to offset a downturn in domestic consumer spending. As the graph below illustrates, U.S. domestic demand leads domestic demand in the world's largest economies by 6 to 9 months.

This is probably the most important point for me. The often quoted line that a faltering US economy will be propped by the likes of China, India and Brazil is little more than wishful thinking. The article conludes:

• Our view is that faltering consumer spending and a continuing housing recession will lead to recessionary conditions in the quarters ahead. This will negatively impact global economic conditions and decrease the U.S. inflation rate from its already modest 1.9%, thereby lowering inflationary expectations, and subsequently long bond yields.