Reasons to be cheerful on the US economy?

Reasons to be cheerful on the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US economy<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /> Firstly there is a good example of the derived demand for labour and the impact that a housing industry slowdown can have on unemployment. The BBC reports that ‘Building and plumbing firm Wolseley plans to cut around 1,300 more jobs in North America after being hit by the slowing US housing market.’ Labour shedding is relatively easier in a flexible labour market; the US business is forecasting that the redundancies will eventually save them in excess of £50m dollars. If lay offs gather increased momentum, then the risks of a full blown recession in the USA are heightened.

Writing in the Times today, Anatole Kaletsky neatly summarises the transmissions mechanism between changes in house prices and the US economic cycle:

There are, in principle, three ways that a housing collapse can affect the broader economy and financial markets:

1. Directly, through a cutback in construction activity.
2. Indirectly, through a negative wealth effect on consumer confidence and demand for credit.
3. Indirectly, through damage to bank capital and, thus, the supply of credit.

Kaletsky offers some optimism

§ The housing sector is weakening but the export sector is booming on the back of the weak dollar – an important counter balance to upwards of ½ a million jobs that might be lost in a housing recession § The scale of income inequality in the USA is enormous – if much of the fall out of redundancy, negative wealth effects from a slump in property values and a general loss of consumer confidence is concentrated in those families linked to sub-prime, such is their low relative income that the aggregate effect on consumption might be fairly small.

Evan Davis has been reporting from the USA this week – covered extensively in his excellent blog.

Tutor2u: US economy in charts