A year after the US financial markets went into a tailspin, the US economy is showing tentative signs of a weak recovery but jobless numbers are continuing to rise, though not at the terrifying rate of six months ago, when 600,000 people a month were joining the unemployment lines.
Something else is happening in America as well. The era of easy credit which fuelled two decades of spectacular growth is over. The American consumer has started saving. Mortgages, personal loans and even credit cards are harder to get. Consumer credit was down 5.2 per cent between April and June. Revolving credit, which includes credit cards, was down 9 per cent. As a result, the turbo-charged consumer market that has powered the American economy since the 1980s has run out of puff.
These developments are likely to define the trajectory of the US recovery - it will be slow and painful.
The US jobless rate rose to 9.7 per cent in August and is expected to peak above 10 per cent in the months ahead. It's already at that level in at least 15 US states and it could be five years before the national economy generates enough jobs to overcome those lost and to employ the new workers entering the labour force.
This fear of joblessness is likely to keep consumers' wallets in their pockets. Without a return to spending - retail sales make up 70 per cent of the US economy - it seems inevitable that the recovery will be slower than in the past.
Of course the pace of a US recovery will have implications for economies worldwide. The Chinese depend on the US as a destination for their manufacturing, and Australia sells China the commodities and energy to power their factories.
As a result we can expect the Reserve Bank to hold fire on rate rises this year despite the recent raft of reasonable economic data here. Even though Glenn Stevens and the RBA board will be itching to get rates back to more normal long term levels, they will be mindful of the precarious state of the global recovery.
The US Fed will be forced to keep rates at near zero levels for some time yet. Increasing rates in Australia will put upward pressure on our currency and endanger the recovery of exports. The Debt futures markets have already reduced their outlook for interest rate rises by half of one per cent, expecting the cash rate to be 4.5 per cent by September 2010 (down from their previous forecast of 5 percent). The cash rate in Australia is currently 3 per cent.
(Source: The Brisbane Times, 21 September 2009)