Hamish McRae: Americans are buying cars again – and that could drive a real recovery
Sunday 26 February 2012
Sometimes someone says something to you that clarifies things. "Look," said a British businessman to me at a conference last week, "if the US economy has really turned up, then we'll be all right, and if it hasn't we'll be in trouble."
That must be right. I don't want to dismiss the influence of domestic policy, and, in the long run, whether we do better or worse than our peers does depend very much on that. But on a two- or three-year view what matters is what happens to the world economy, and the largest single element of that is the US: it is bigger than the eurozone, though not the whole EU. Of course power is shifting towards China, India and the other emerging economies, and it will continue to shift. But, as of now, the US is the place that matters most and it seems to be turning up.
The US economy is the most over-analysed on earth. The wall of sound that comes across the Atlantic, and not just from the Oscars, makes it hard to distinguish the signals from the background noise. Worse, these over-analysed data are frequently wrong: for example, the initial US growth figures are generally revised downwards. And the anecdotal evidence you get can be misleading, because what is happening in New York or Washington DC tells you nothing about what is happening in Billings, Montana. There are, however, two bits of data that I always find helpful in giving a feeling for what is really happening: car sales and the housing market. Both are beginning to feel pretty positive, though one more than the other.
Car sales matter because they are a huge industry, but also because they are the largest single consumer purchase. So they affect activity and employment directly, but they also say something about the mood of consumers. That mood seems to have brightened considerably over the past few weeks.
The year is off to a good start, and J D Power, the research and consultancy firm that specialises in the motor trade, has just revised upwards its sales forecast for cars and light trucks this year to 14 million. It thinks that sales may reach 16 million by 2014. That would still be short of the peak, for between 1997 and 2007 sales averaged 17 million a year. But it would be vastly better than the low of 2009 at 10.4 million, the lowest level when adjusted for population since the Second World War.
This recovery has been driven in part by cheap credit. Six-year loans account for nearly a quarter of personal purchases, reflecting the fact that in the US a car is much more of a necessity than it is here. But it must also reflect a rise in confidence that people will be in jobs and will be able to keep up the repayments. The graph shows how the jobs market has turned securely upwards since the spring of 2010, for while there have been months when the private sector has not created enough jobs to offset the loss in public-sector ones, there has not been a single month when the private sector has been a net shedder of labour. That has happened despite the shading back of manufacturing optimism since last summer, the other thing shown in the graph.
The second chunk of data I like looking at is the housing market. In shorthand, the US had a boom that was pretty similar to the one that happened here, but prices subsequently fell back a lot further. As a result, prices in the US are, on average, close to their long-term trend, or at least within a few percentage points of it. So the value is reasonable for anyone thinking of a long-term purchase. But if the value is only reasonable, the affordability is extreme. Thanks to the low mortgage costs, the monthly payments relative to incomes are for many people the lowest for a generation.
So though prices for existing homes are roughly stable, maybe down a couple of percentage points on the year, activity is running up about 5 per cent year on year. The stock of homes on the market has fallen quite sharply, down 20 per cent on a year ago, so the general tone of the market is gradually looking more healthy. The proportion of first-time buyers is creeping up, fewer mortgages are being declined, and while distressed sales still accounted for one-third of transactions in January (a scary proportion) that is lower than a year ago.
It is hard to generalise, but what seems to be happening is a gradual return to normality, with quite a bit of investment money now coming into residential property. A lot of the homes bought as investments are paid for in cash. In the US, as here, there is a lot of that stuff sloshing around and hunting for a better return than the banks offer. The central point here from a macro-economic perspective is that while the housing market is not driving recovery, it is no longer holding it back. That is the best you could hope for at this point in the economic cycle.
So what happens next? The main area of concern that is often cited is that a eurozone recession might derail US recovery. I don't find that credible for two reasons.
One is that while exports to continental Europe of course matter, the numbers are not large in the context of the total US economy.
The other is that if the eurozone were really to tank, that would cut demand for energy and raw materials, and the resulting fall in prices would boost real demand in the States as elsewhere.
I do think there is a threat from the oil price because that has a bigger impact on household budgets than it does here, but more expensive oil may be something the whole world has to live with for a long time. Americans taking out those six-year vehicle loans would be wise to use them to buy more fuel-efficient cars.
The big point, surely, is that the gradual improvement in the quality of US growth, not just the running numbers, means that the recovery is more likely to be sustained. Not all the news coming through is positive, but then it never is. And, final point, this is an election year and the US tends to do better when an election is in sight.
Now we know the worst of RBS and Lloyds, and casino banking isn't to blame
Business news for the past few days has been dominated by the bank results, in particular of course those of the two part-nationalised banks, RBS and Lloyds. Amid all the somewhat predictable comment a couple of elementary points have been rather eclipsed.
The first is that while the scale of the mess those two banks had managed to get themselves into is even worse than we thought, most of the bad news is now known.
The second is that the problem was bad commercial banking, and had nothing, or at least very little, to do with investment banking.
On the first, the share prices tell the story. In RBS and Lloyds the investment by Her Majesty's government fell to less than half its original value. A similar downgrading took place in the price of most European banks too.
But in recent weeks there has been a solid recovery. We are not yet back to anything like the place we started from, but the markets now reckon that the worst is known. We know that there is a lot of European sovereign debt still out there that will not repay 100 cents in the euro, but provision is being made for that. We know pretty much the scale of losses on Irish property and on commercial property elsewhere. And provision has been made for the PPI mess, not before time.
On the second, well, all those mis-steps noted above are aspects of commercial banking. They are not wild, speculative investments dreamt up by clever mathematical doctoral students who decided to apply their skills to making money.
Buying Greek debt is, I suppose, an unconventional investment for a commercial bank such as RBS, but it is not really casino banking. Or if it is, buying British government debt at present low yields looks to me like casino banking too.
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