Why 2008 US housing bust is different from the 1990-1

Art, 4 May 2008

The US unemployment or job loss in April'08 was milder, -20K than projected by the analysts, -70K. It gave hope to those who wanted to believe that the US economy is stronger than expected.

It shouldn’t surprise anyone as the USD 120 billion is about to be pushed into the pockets of consumers in May and June ‘08 and firms are gearing up to grab the that ‘free’ cheques with the buildup of their inventories. So, the 1st Qtr 08, US showed 0.6% growth instead of an expected contraction.

Similarly, the upcoming month’s economic figures on production should become more positive than initially thought, though April 08 sales will still be weak (but not bleak) as some consumers may even spend ahead of their cheques’ receipt. We should also be expecting another ‘healthy’ looking US economic data in the month of Jun 08 and Jul 08 (though slightly weaker due to its secondary effect). Aug 08 economic data will be dim, causing most investors to turn cautious. Sep 08 is where the further weak economic data starts to shaken investors’ confidence. Oct 08 is when the doubts turn into fear followed by panic, which will result in the rout of the US financial markets.

Many want to believe it is a passing storm, just like the 1990-1 housing bust.

In 1990-1, similar housing loans collapsed led to a 3 quarters’ US recession, which did not led to a global recession. Many believed it is the same this time round, but it is NOT going to be the same as the major negative factors are much amplified.

The main difference between the current 2007-8 and 1990-1 US housing loans collapsed are:
1. Income grew only 0.25% leading up to Jan 2008 vs. 1.3% before the 1990 recession
2. Savings rate is 0.3% in past six months end Jan 2008 vs. 7.1% during 1990 (In 2008, 80% of US population earns only 10% of GDP)
3. Consumer spending is already down by 0.2% at this early phase of 2008 downturn vs. down 0.1% in 1990 at its weakest moment (consumer spending account for 70% of GDP)
4. Consumer inflation, CPI is 0.3% in Mar 08 and is expected to deteriorate further with heighten food and energy prices, sucking in large portions of the expendable income, thus reducing consumption for all other items.
5. Shiller US house prices Index declined 21% from the high in 2008 vs. 4% in 1990
6. Corporate profits dropped by 17.6% in 2007 vs 15.7% in 1991. (2008 is expected to be even worse off)
7. Domestic investment is projected by some analysts to drop only by 8.9% in 2008 vs. 12.7% in 1990 but if businesses expect a weak consumption after the hand-out, and profits is falling with PPI growing at 13% annualized, then the projected 8.9% drops in 2008 is not realistic. It will be worse off.

Fed is left with only 2% and due to inflationary pressure, it has entered into a lose-lose situation where any further cuts will trigger heighten inflationary expectation, and on the other hand, tightening will weaken consumers and investment demand.

The weights of the negative factors in US will be too strong, it will go on to destroy many economic activities in its path before US economy can stabilize, possibly 3 years from now.

So, before the expansion can take can place from the USD1 trillion to USD10 trillions, the global economy will have to go through a traumatic phase of stagflation. Though Asia has reduced its exports to G3 (US, Europe and Japan) over the years, it is still at 61.3% and US accounts for about 1/5 of the Asian exports. US slowdown will also drag Europe and Japan down, though at a lesser degree. Asia will slowdown by at least 1/4 effect of US slowdown from its export pace. Singapore having high export exposure (about 70% export and re-export) to US market will suffer more.