One of the biggest questions for the global economy in 2012 will be whether the US follows Europe into recession – the other is whether the large developing economies will be able to repeat their strong growth performance during the previous wave of the financial crisis in 2008-2010 by ‘decoupling’ from the US and Europe.
A significant negative for US prospects came with the release of the latest S&P Case-Schiller house price index. This showed a larger than expected 3.4 per cent annual fall for the latest period for which data was available – October. But much more significant than one month's figures is the overall trend.
As shown in Figure 1 US house prices reached their post-financial crisis low in May 2009 after falling 31.7 per cent from their peak. Recovery continued until May 2010 after which prices began falling again. By October 2011 US house prices were 33.0 per cent below their all-time peak – the worst level since the international financial crisis began.
As housing is, with shares and bonds, one of the three great US asset classes, a significant fell in this category will have an impact across the whole US economy. In particular:
- it will further negatively impact the balance sheets of US banks;
- it will have a dampening effect on US consumer spending
The overall view of this blog remains that the US will continue to have historically slow growth rather than re-entering a recession, and the latest US consumer confidence figures for December were the best for eight months. But the fact that the trend of US house prices has now been down for 17 months is a serious negative.
Whatever their immediate mood US consumers are constrained by objective financial factors. With unemployment not falling significantly and incomes not rising falling house prices will further constrain consumers. The recent increase in consumer purchasing in the US has been financed by a reduction in savings levels – which is unsustainable.
The house price data by itself does not lead to a view the US is entering recession, but it pushes US growth towards the ‘slower’ end of the ‘slow’ spectrum.