“It’s the level, stupid – it’s not the growth rates….”

Company Strategy, Economics, Europe, Markets, US

…..said Mervyn King, governor of the Bank of England

mervyn.gif

Source of picture: northbriton45blogspot.com

ANY excitement over US house-price figures for July – which showed the biggest monthly gain for years when they were released yesterday – has to be put into the kind of context that undermines a lot of recent positive economic numbers.

The price recovery is partly the result of the $8,000 tax credit for first-time buyers and the Federal Reserve buying mortgage-backed securities. The tax credit expires at the end of November.

Inventory of unsold homes is at its lowest level in more than two years, according to The National Association of Realtors.

But there’s a “shadow inventory” of delinquent or foreclosed mortgages of some 7m houses, according to Amherst Securities.

This matters to the global chemicals industry because of the large amount of chemicals and polymers which go into your average US home.

More importantly, without the return of some kind of “wealth effect” (this still seems a long way off in real-estate as the S&P Case Shiller Index is still 30% below its 2006 peak) it’s hard to see a sustained rebound in US consumer spending.

“It’s the level, stupid – it’s not the growth rates. It’s the levels that matter here,” Mervyn King, governor of the Bank of England, was quoted as saying last month.

Levels to be concerned about include western consumer indebtedness that is still too-high relative to income expectations and credit availability, wrote Mohamed El-Erian in the FT yesterday. He is chief executive and co-chief investment officer of Pimco.

Bank balance sheets are also still too geared for the comfort of regulators and the managers of the banks, he added.

As my colleague Nigel Davis saidthis Insight article from ICIS news, real levels of lending to businesses, especially the small -and medium-sized ones, remain constrained.

Unemployment has also risen well beyond expectations and it will take years for the jobless rate in the US to return to its natural rate, El-Erian continued.

Yesterday I quoted the excellent Schork Report which put into context some more supposedly encouraging statistics: July’s Vehicle Miles Travelled (VMT) figures were released last week, showing a 2.3% increase from July 2008.

But as the authors pointed out: “The July number was still down by 3.5% compared with July 2007.”

This was a year when demand for just about everything under the sun was at historic highs.

Further – the modest improvement in July 2009 happened after a 38% year-on-year fall in gasoline prices.

Growth in urban VMT was less than that for rural travel, according to the latest statistics.

Urban driving is seen a stronger indicator of overall economic health as it includes travel work.

Unemployment was therefore a threat to the “nascent recovery”, added the Schork Report.

The US Conference Board’s latest index of consumer confidence, which was also released yesterday, seemed to support the Schork view: The index slid to 53.1 in September from 54.5% in August.

How should chemical companies respond to these challenges?

There will be more on this, and the implications for Asia, over the coming days and weeks.

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