THOSE in the US who have begun predicting the end of the credit crisis ought to have tuned in to National Public Radio last week when they would have heard what the housing crisis means for ordinary Americans.
Stories of families moving back to Mom and Dad's after struggling to either buy a home or keep the one they already had rammed home the message that this is a problem likely to run and run.
At the beginning of the week, it was easy to write t
hese people off as a tail-end minority emerging from the trough of the worst US housing slump in more than two decades. However, opinion has shifted significantly as signs of a continuing decline in house prices and a build up of inflationary pressures have caused Wall Street to worry about consumers' ability to spend the US out of economic slowdown.
"I don't think anybody is fooling themselves that it is going to be easy from here on out," says Paul Ashworth, senior US economist with Capital Economics in Toronto. "House prices are plummeting, confidence is plummeting, and inflation is very much on the rise."
Indeed, the cost of oil and food, not to mention other products, has made investors quite jittery. Although oil prices eased back from an all-time peak of more than $135 per barrel, no one expects any serious relief in the near future.
Even before oil touched these record-breaking levels, the cost of gas had been grabbing headlines for months in the auto-addicted United States. E-mails on how to get best value at the pump – "fill up your tank when the temperature is cooler" – have been zipping their way across the internet for months.
In response, the US House of Representatives overwhelmingly passed legislation last week that would allow member states of Opec to be sued in US courts for limiting oil supplies and colluding to fix prices.
The Gas Relief for Consumers Act is not expected to make it into law, as it must still be approved by the US Senate and President Bush, the latter of whom has already threatened a veto on the basis that such lawsuits would be counter-productive to overall trade. However, this political gesture in an election year should play well with voters who are increasingly short of cash despite the return of tax dollars by the federal government in the coming weeks.
"Obviously we have got the tax rebates coming, so that should be some help (towards boosting consumer spending], but of course a lot of that will be swallowed up by filling up at the pump," says Ashworth.
Meanwhile, US homeowners can only sit and watch as the value of their properties continues to drop. On Thursday, a key government index showed that home prices fell at a record pace in the first three months of 2008, resulting in a year-long decline in house prices.
The house price index produced by the Office of Federal Housing Enterprise Oversight (OFHEO) recorded a 1.7% drop between January and March, the largest quarterly decline since the index began in 1991.
The index is down 3.1% during the last four quarters, the largest decline over that period in the history of the index.
The unease caused by these continuing declines has cut into the profits of nearly every major quoted firm reliant upon the US housing market, as homeowners cut back on everything from major maintenance to the purchase of new fixtures and fittings. Most recently, DIY chains Lowe's and Home Depot fell victim to the spending crunch, while hundreds of thousands of smaller firms are feeling the pinch as well.
Adding to the gloom is the increasingly unlikely prospect that US interest rate authorities will further cut the cost of borrowing. Having slashed rates by 3.25 percentage points since mid-September, the US Federal Reserve has little room left to cut from the current 2% benchmark, particularly against a backdrop of surging prices for energy and commodities. Despite the simple arithmetic weighing against a further cut, some analysts still believe monetary authorities will be forced into further bold moves. The pressure was not eased when a top official from the International Monetary Fund warned on Tuesday that the global economy remained threatened by both financial instability and the spread of slowing US economic growth to the rest of the world.
"We still see serious risks to global financial stability," said John Lipsky, first deputy managing director of the IMF.
"Policy-makers need to avoid complacency and take steps to restore confidence."
Lipsky, whose remarks were made in Tokyo, added that "perhaps extraordinary" measures would be needed if the US economy did not recover from its current malaise later this year.
"Persistently weak US growth would significantly inhibit a return to trend growth in other advanced economies, and could undermine growth in emerging economies as well," he said. Just a day after his comments, the IMF confirmed it was cutting its global growth forecast for 2008 to 3.7%, down from 4.1% previously.
At the heart of Wall Street, the consumer crunch is also making waves. Infamous banking analyst Meredith Whitney – who shot to notoriety when she predicted troubles at Citigroup last autumn – has now weighed in with her opinion that the major US banks will need to take an extra $170bn of write-downs by the end of next year.
The notoriously bearish Whitney cited the collapse of the securitisation business and a "sharp" pullback in consumer spending as the main reasons for this prediction.
There are few among the ranks of analysts who count Whitney as a friend, but there are also few who now disagree that economic recovery will be a long slog, rather than a quick rebound.
"There is no magical cure here," said Capital Economics' Ashworth. "Consumers are just facing a lot of headwinds now."
The full article contains 993 words and appears in Scotland On Sunday newspaper.
