The Hindu Business Line : US: Recovery is still some way away

The “green shoots” argument that has everyone hoping that a recovery in the US economy is around the corner is already beginning to sound a little weak, with the latest set of economic data releases. Investor and consumer sentiment in the US has certainly improved in the last couple of months, with the results from the bank stress tests convincing many that the worst of the financial crisis is over. But a slew of data, be it retail spending numbers, industrial production or housing data, suggest that it could still be a long road to recovery.

Consumer spending, the main driver of the US economy and the most important indicator of how the economy is doing, has been tepid, at best. The country continues to shed hundreds of thousands of jobs every month, although the pace of layoffs did slow last month. With housing prices showing no concrete signs of stabilising, consumers faced with depleted assets, heavy debt and job uncertainty are likely to save more. The US personal savings rate climbed to 4.2 per cent in March. It was less than 1 per cent before this recession started. A higher savings rate could mean that more pain is in store for economy.

Here is a quick look at some of the recent performance indicators in the US.

Retail performance

Improving consumer sentiment indicators and stronger-than-expected same-store sales numbers by a few discount retailers had raised expectations that retail performance in April would be positive. However, retail sales declined by 0.5 per cent in April, following a decline of 1.3 per cent the month before. On a year-on-year basis, sales dropped 10.1 per cent. The decline in sales was across the board, though electronic appliances suffered the most. Significant “downtrading” has been witnessed in the last couple of quarters, with consumers abandoning luxury retailers and flocking to discount chains such as Wal-Mart. Wal-Mart has been a clear winner in this recession. The world’s largest retailer recorded a 6 per cent growth in same-store sales in April. The store has seen an improvement in gross margins as its new, more affluent customers are purchasing its higher value discretionary merchandise such as electronics. Luxury retailers, on the other hand, continue to see declines in same store sales.

Retailers in the home-improvement category, such as Home Depot and Lowe’s, managed to meet investors’ expectations. But their performance is still suffering, as consumers remain reluctant to purchase big-ticket items.

Housing data

What could give consumer spending a boost is better performance of the housing market. Yet, recent housing data has been sending mixed signals as to where the housing sector is headed. Just when the housing sector showed signs of stabilising, housing starts — the number of new houses under construction — fell to a new low in April, dropping 12 per cent.

Renewed spikes in foreclosures also threaten to keep inventories high. Unless there is a significant increase in housing starts again, which has a cascading effect on the demand for housing solutions, furniture and home decorations, consumer spending is unlikely to get a sustained boost. Finally, after a brief respite last month, unemployment numbers are expected to climb again. Industrial production continues to slow down, though at a slower pace. Capacity utilisation is now below 70 per cent. The restructuring efforts of Chrysler and General Motors are likely to disrupt the labour market over the next couple of months as well.

The bottomline is that while investor sentiment is improving, there is very little in the current numbers to confirm any imminent recovery in the US economy. Investors may have to wait for some more time for the green shoots to sprout.

(The author, a former BL Research Analyst, is based in New York)