The US economy is hurting and Australia is not immune: Gottliebsen

Back on May 27, a time of extremely market volatility, a number of readers sent in critical comments to Business Spectator when I wrote: “Two American dreams were once again shattered last night. When the Dow Jones Industrial Average is trading above 10,000 there is a general view in the US that all is well with the world. The Dow last night closed below 10,000 – the first time since February…

“And a second shattering came as the rotten core in the US housing dream resurfaced with one in seven US home mortgages in trouble. This has implications for the entire US banking system.”

Soon after that article Wall Street again surged above 10,000 on a wave of false optimism only to fall below 10,000 on Tuesday night (Australian time) as a series of fears swept global markets. With an hour to trade this morning the Dow was holding its Tuesday level but in the last hour of trade it fell away to close at down one per cent at 9774.

The analysts will have all sorts of reasons for the latest fall including the avalanche of selling that a sustained fall below 10,000 in the Dow index has triggered among chartists.

But the underlying reason goes back to the deep problems Morgan Stanley isolated in the American housing market and their effect on US consumers.

The US News newspaper this week reports that Americans are “bummed out”.

“Consumer confidence has turned south, with more than half of all Americans believing we’re still in a recession, even though economic indicators say otherwise. People are afraid to spend money. Rising numbers of people worry that they won’t be able to retire or their kids will end up with a lower standard of living”.

Those rather emotive words come from a survey by the Pew Research Centre which found that 63% of Americans say it will take three years or longer for them and their families to recover from the recession. Sixty per cent think they’ll have to delay their retirement. Only 45% think the next generation will have a higher standard of living, down from 61% who felt that way in 2002.

According to the Pew survey, Americans are reacting to this view about the economy in a very traditional way. Forty-one per cent say they plan to spend less when the economy improves, with only 11% planning to spend more. Half plan to save more.

Surveys can be wrong, but I quote this one because it’s exactly what you would expect from any society where there has been such a dramatic fall in house prices and there still remains a mountain of problem housing loans.

Most American share analysts had expected the US economy to bounce back and profits to surge. That’s why only about two months ago (April 26) we saw the Dow trading above 11,200 – it has fallen 13% since then. There have been some good profit results because of corporate cost management and overseas earnings. But the basic American business structure is based on consumers spending money. American consumers have not stopped spending, but they are now more price conscious and wary of spending so that is going to hold back profits in a whole range of industries.

And when Americans see the Dow index below 10,000 it multiplies their fears and creates a vicious circle. Australian consumers are insulated by our high house prices but the sharemarket is not protected.

This article first appeared on Business Spectator.