America's cautious step towards recovery

The economic slump dubbed the “Great Recession” is receding although consumer confidence remains low, reducing the possibility that the US will soon spend itself out of economic crisis. Key data released here in Washington on Wednesday reveal that the US economy, the engine of the global economy, is slowly recovering. “Slowly”, is the key word here, say economists consulted by Deccan Herald.

Home sales in July rose 3.2 per cent compared with June and 12 per cent compared with July 2008. The government's policy of giving an $8,000 credit to those willing to buy homes for the first time has helped spur sales. Similar credits of $3,500-$4,500 to car buyers have boosted vehicle sales as well. The manufacturing index rose to 52.9 per cent, indicating that the economy is expanding rather than contracting. Manufacturers have used up inventories, are now making new products and are employing staff.
However, these indicators have not had a positive impact on the financial sector where stocks, which rallied in spring, fell sharply on Tuesday following a drop of 6.7 per cent in the Chinese stock market. European markets followed suit. The abrupt plunge demonstrated global economic interdependence and revealed that the fate of the US economy is closely linked to developments in the major Asian powerhouses, China and India.

Other indicators are contradictory. Speciality clothing stores - where a large percentage of the goods are from India - sold $13 billion in merchandise during August as compared with $11.9 billion during the same month last year. But outlets for other goods have not seen similar rises.  Oil prices fell 3 per cent to $68 a barrel on Tuesday when funds flowed into safer investments. Consumer optimism had boosted oil prices from $32 last December. Finally, the dollar once again became a safe haven rather than more productive investments.

Across the US there are wide swathes of improvement and pockets of distress.  Michigan, once the centre of the powerful automotive industry, remains in deep recession. The unemployment rate in Detroit, “Motown”, is the highest in the US. General Motors, formerly the largest vehicle producer, has not recovered and is cutting benefits for workers and retirees. They expect further punishment. But Ford and Japanese car makers are doing well.

In the pleasant suburb of Birmingham, Deccan Herald spoke to Lynne Lyman the wife of Larry Lyman, 60, a teacher who took a $125,000-a year job teaching English literature in a secondary school in Abu Dhabi. For Lyman, the job is both challenge and adventure, as he had never travelled in West Asia before flying there last month. More than 350 teachers, some youngsters in their 20s, others in their 50s, have taken up jobs there, following the well-trodden path of unemployed Indian teachers and professionals.
In Boston, a major financial centre, banks have been stabilised by the government’s injection of funds but uncertainty continues to plague the sector. Salisbury, Connecticut, a picturesque village on the border with Massachusetts and New York, has had a reasonably good tourist season. “Rich people from Boston and New York City still come here,” stated the desk clerk at the 150-year-old White Hart Inn.

Anny Souri at Byzance, a shop selling fashionable Indian clothing and jewellery, said that business has been very good this summer. Other stores along Main Street have also prospered because wealthier citizens have spent their holidays touring local beauty spots instead of travelling abroad.

A lack of consumer confidence is the main reason recovery remains slow. Recent surveys show that the confidence index fell from 66.0 in July to 65.7 in August. The chief worry is about the “sustainability of the recovery”, said Christopher Low, a leading economist in New York. “It's clear to me that we cannot count on growth through next year as long as consumers are still on the ropes.” The end on August 22 of the government programme to subsidise car sales and the November halt for credits on first homes are certain to have a negative impact on commitment to such major expenditures. Furthermore, the spike in spending on school supplies and autumn clothing expected during the coming long Labour Day weekend is unlikely to reflect a resumption of consumer confidence.
The problem is, of course, that people have little confidence in the financial sector or the ability of the manufacturing and commercial sectors to recover. Confidence begets confidence and encourages people to spend.

Unless consumers regain their confidence, they could continue to hold onto the cash they possess in the hope that the economy will pick up. But this will not happen as long as they do not spend.