Psychological damage to US economy
While the current US housing contraction has caused plenty of fears and worries, its direct impact on the broad US economy has been rather limited. Much of the damage has been at the psychological level.
WHILE the current US housing contraction has caused plenty of fears and worries, not just in the US but throughout the world, most do not realise that the direct impact of the housing contraction on the broad US economy has been rather limited.
A lot of the damage has been at the psychological level.
This is due partly to the fact that house prices, which rose substantially, have been dropping recently.
Another factor has been the constant media attention given to scary forecasts that the current housing contraction is the worst since the 1930 Great Depression and that this time around, it could be heading that way.
Fortunately, the facts of the matter do not support such a negative view.
The chart shows that the single–family housing starts over the last 50 years, a period that covered all kinds of recessions and financial crises.
Some of these recessions and crises were as severe as the current economic situation, while some even more serious and frightening than the current global turbulence.
The 1973-75 recession was very severe and global in nature. All the major economies were very badly hit by the first oil shock. Inflation and interest rates skyrocketed globally.
The economic slump was very severe.
In fact, at that time, it was the worst economic recession since the 1930 Great Depression. Unemployment rate skyrocketed to nearly 9%. In 1973-74, the S&P 500 plunged around 50%. There were bank failures.
The 1980-82 recession was also severe and global in nature. Like the 1973-74 contraction, there were fears and panic everywhere. Mexico defaulted.
It was the start of a global disinflationary phase as the impact of then-US Federal Reserve chairman Paul Volcker’s severe monetary tightening bit. The S&P 500 plunged 30%. The US unemployment rate skyrocketed to double digits.
In contrast, i Capital thinks that what is happening at present is actually very mild.
The unemployment rate is at a healthy 5.4%. While inflation is rising, the cause is cyclical in nature. The S&P 500 cannot even stay in bear market territory.
The rise in oil price, while very substantial, has been spread over eight to 10 years. Of late, interest rate has dropped instead of rise.
US productivity growth has remained impressive unlike in the 70s and 80s.
The present decline in housing starts has been sharp but instead of fearing more declines to come, the plunge is very close to its end.
Most importantly, the recessions in 1973-74 and 1980-82 did not have a fast transforming and developing China. The world economy simply did not have any other major sources of economic growth, unlike nowadays.
i Capital is not even convinced that the US economy is in recession.
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