Wednesday, June 30, 2010

US Housing and Confidence Review

Markets took a dive today as the US consumer confidence numbers disappointed; showing a reading of 52.9 vs consensus 63.3, and down sharply on the May reading of a downward revised 62.7, as consumers adjusted their views slightly on the back of a still tepid jobs market.

But it's not really time to hit the panic button yet, a lot of commentators are running around saying we are on the cusp of the next great depression, but at least in terms of the consumer confidence numbers there's not really anything to worry about. It just reflects the reality that things are hard, jobs are still growing relatively slowly, the housing market is going sideways (if not down), and the priority is squarely on recovering and de-leveraging; though things may be bad they are not dire, yet.

There is a tail risk that things could get a lot worse, there is a reasonable probability that things will slow further, and then there's a pretty good chance that things will carry on just fine and that the gradual economic recovery will continue even as stimulus measures run their course (though note, a lot of the stimulus plan is still unspent). Indeed on the stimulus front, the rhetoric from Washington seems to be more for additional stimulus than fiscal austerity/responsibility.

Speaking of tail risks, the US economic Achilles heel; the housing market, showed further signs of not really doing much at all in April. The 20-city composite index was up 0.4% month on month, and 4% year on year. This is still an area of vulnerability as the potential for further defaults rise given the tough conditions (as confirmed by the confidence numbers), and slow or no income growth puts a cap on demand.

There is a non-zero probability that the US government will provide additional stimulus targeted at the housing market to put a floor under prices; especially with congressional elections in November. If not the path of the housing market will likely be dependent on lending rates staying low, and jobs growth picking up appreciably - neither of which are exceedingly likely outcomes.

So what are the key points? I have presented both a positive and a negative spin on the data; there is the reassurance - or seeing the numbers as what they really mean. But there is also the recognition that things could get worse; but that they will likely carry on business as usual; and that the gradual - yet fragile economic recovery will continue. In other words, don't panic yet, this is what a recovery from such a deep and structurally meaningful recession should look like. At least save your panic for when or if the tail risks materialize!

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