US RECOVERY / THE FINANCIAL TIMES LEX

US recovery

Published: November 24 2009 15:02

It is going to be a long slog. The US economy only grew at 2.8 per cent in the third quarter compared with the second, rather than the original estimate of 3.5 per cent, thanks in part to weaker consumer spending. The downwards revision compounds worries that, particularly as the the effect of short-term boosts such as clunkers fades, the economy is not growing strongly enough to start meaningfully generating jobs.

US households which are still over-geared are evidently prepared to take advantage of short-term government handouts. But Tuesday’s consumer confidence survey confirmed that the prevailing sentiment remains gloomy. The headline gain, notes High Frequency Economics, reverses only a quarter of October’s unexpected fall. Consumers’ assessment of their current predicament remains stuck at levels last seen in the early 1980s. And while a slight improvement in short-term outlook reflects that fewer people see further deterioration, fewer consumers, too, have any faith that business conditions are poised to get better.

The original meltdown market – housing – could knock consumers’ shaky confidence further. True, September marked the fifth month of improvement in house prices, according to the S&P Case-Shiller indices, with their 10 and 20-city measures now falling at single-digit annual rates. But the pace of improvement slowed after a strong summer, helped by a now-extended programme of tax credits, and was weaker than expected given the surge in existing home sales.

Next year holds the prospect of a second wave of defaults, as payments rise for the first time on mortgages designed on the basis that perpetually rising house prices would enable refinancing. An estimated $370bn is set to recast in the next two years, according to Credit Suisse. That could coincide with rising supply as private sellers and banks hoarding foreclosed homes release them onto the market. Prepare for a tough and uneven climb.

Copyright The Financial Times Limited 2009