Earlier this year, analysts warned that should house prices stop rising, then the result could be recession. Falling house prices seemed unthinkable. And yet, things have got so much worse, but most are still saying recession can be avoided, and now they have started talking about mid-cycle blues.

Take a deep breath, here is the bad news.

According to the SP/Case-Shiller index, the median price of houses across the US fell by 3.9 per cent during the year to August. According to the National Association of Realtors there are now 4.58 million homes for sale in the US. That’s the highest ever. It amounts to the equivalent of ten months worth of supply. There are also enough unsold single family homes available to feed demand for 9.8 months, the highest level seen since May 1989.

Then there’s consumer confidence. For much of the year, the Conference Board’s survey of consumer confidence was busy defying all the predictions of a US economic slowdown. The consumer confidence index in July hit a six-year high at 11.9 points. It was as if the US consumer was divorced from all the talk of doom. Some suggested that the US subprime crisis would remain isolated and would have a minimal effect on middle America.

Even the August reading at 105.6 was surprisingly high, bearing in mind what was going on. But now, a month on, and it seems reality is hitting home. The consumer confidence index fell to 99.8, the lowest level in two years.

consumer conf

Okay, it wasn’t all bad news. While one survey had house prices down, the National Association of Realtors recorded a 0.2 per cent rise in median price, the first positive reading for some time.

It seems inevitable that the Fed will cut the rate of interest some more. It’s only by doing this that it can avoid recession in the US, but don’t forget what commodity guru Jim Rogers said earlier this week. “The clowns in Washington have signalled to the world they don’t care about the U.S. dollar,” he said. Mr Rogers reckons that the commodity rally may have another 15 years to run, and oil will hit $150 a barrel. He believes that agricultural products will shoot up in price too.

Earlier this week Federal Reserve Bank of Dallas President Richard Fisher said the Fed had some “wiggle room,” insofar as it could get away with cutting interest rates without creating inflation, but he questioned whether the wiggle room would be enough.

We are not sure there is sufficient space to wiggle. With commodity prices still so high, with demand from China and India pushing up prices and with the dollar falling, inflation could easily return. Once again, we may need to look towards China. If it does what the US wants and lets the yuan appreciate then inflation in the US will be the result. If the yuan stays where it is, then China itself will experience inflation, and at least some of this will be exported.

The underlying problem is this. Global demand, fed by Western debt, is outpacing global supply. Inflation is the inevitable consequence of this: inflation and too much debt. By reducing interest rates, the Fed may be reinforcing existing problems for the future. It seems that in order to solve the underlying issue, the global economy needs to slow. Will the US economy be able to manage to avoid recession when it adds this international pressure to its domestic woes?If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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