Hong Kong Commercial Daily, Hong Kong
The U.S. May Experience
Another Recession
By Liu Xin
One thing that’s worth mentioning is that the debt-ridden condition of the United States is different from that of Europe.
Translated By Tim Lim
3 May 2010
Edited by Stefanie Carignan
Hong Kong - Hong Kong Commercial Daily - Original Article (Chinese)
Because of low interest rates, countries are beginning to see inflation. In search of good countermeasures, all major economic powers will take any sign of trouble into account. European countries’ debt crises first alarmed the United States. Furthermore, the housing market is still in the doldrums, coupled with mixed reports from employment data, the market began to worry that the U.S. economy would go into another recession.
It Will Not End-Up Like Greece
After a growing global focus on the European debt crisis, many investors have turned their attention to U.S.'s seriously imbalanced asset and liability issue. The White House expects the U.S. deficit to reach 1.56 trillion dollars in 2010. This makes up more than one percent of the total U.S. GDP. The government's total debt will balloon to 9.3 trillion U.S. dollars, which is more than 60% of the total GDP. The amount of debt and its burden are indeed concerning.
One thing that’s worth mentioning is that the debt-ridden condition of the United States is different from that of Europe. In the recent Greece crisis, Greece needed the EU and the IMF for financial bailout that was subjected to the Lisbon Treaty. The treaty states that EU financial assistance will only be provided in the event of uncontrollable risk.
However, the U.S. can directly buy back government bonds from the secondary market through the Federal Reserve. Furthermore, it can even use the new regular tool established during the recent financial crisis to continue issuing new bonds in the primary market. For those reasons, it is believed that the United States will not end up like Greece in the foreseeable future.
Private Demand Fails to Support the Economy
Regardless of the economic system, job market growth is the most important part of economic growth. The U.S. unemployment rate continued to rise since the financial tsunami. In October last year, the jobless rate surged to a 26-year high at 10.1%, a total loss of more than 470 million jobs. The figure is a 30 percent increase compared to 2008 at slightly above 360 million job losses. Although the unemployment rate fell to 9.7% in the first quarter of this year and non-farm job creation has also improved, the March job growth figure included 30% short term work created because of the United States decennial census.
The most important thing is, if the opportunity for long-term unemployed job seekers to seek employment dwindles, in the end the high unemployment rate will turn into economic ills. The situation will not be easily improved and will slow the momentum of economic recovery, and eventually could result in a secondary recession.
In addition, newly nominated Federal Reserve Vice-Chairman Janet Yellen also predicted that the private demand would fail to support the current job market. Therefore, the U.S. government needs to increase spending to stabilize the economy, and the unemployment rate is expected to remain at 9% or above.
Property Market Rebound Remains Weak
The property market outlook remains pessimistic. New housing contracts have continued to drop since early 2006. Although the new housing start averaged at about 500,000 per month in most months, it only totaled less than half of the 2007 level. The situation has not seen improvement to date. New home sales fell to an average of only 340,000 per month in the first quarter of last year. Although at one point in mid year it bounced back to 400,000, it then dropped to 310,000 in the first two months of this year, the lowest ever recorded since 1963.
Second-hand property sales are no different. At one point during the middle of last year, it rebounded sharply to 6.5 million units at 2006 level, but then quickly sizzled out. In February this year, the sales fell about 30% from last year's high to only 5.02 million, the lowest in eight months. Overall, the U.S. housing market rebound is still weak and is not out of the woods yet.
In conclusion, the United States debt liability may not be a big issue in the short-term, but high unemployment rates and a sluggish property market are without short-term solutions. The effects of the financial stimulus package after the financial tsunami last year have slowly worn out. If no new positive factors emerge in the next two years, the U.S. economy will likely double dip.
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May 17th, 2010 at 3:14 pm
I agree with you’re assessment, and I hate to be the bearer of even more bad news, but the unemployment rate you quote is incorrect. Current unemployment reporting methodology is no longer adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. Our actual unemployment is probably running at 17% to 22%.
Our government has developed methods of skewing the consumer price index as well, and these numbers have not been properly determined since before the Carter era…when determined in the same fashion as it was, pre-Carter administration, our consumer price index (the best measure of inflation) is not around 2.5%, it is more like 5.7%.
Hey, they lie to us, too…