Housing, unemployment and deflation hit as US inventory bounce ends

The inventory rebound that returned the US economy to growth in the first half of the year is being undermined by the continued poor outlook for housing and jobs amid deflation.

Deflation is the mark of a contracting economy. US consumer prices are forecast to have dropped by 0.2 per cent in May after a 0.1 per cent fall in April, according to a Bloomberg survey.

Housing recession

Housing starts are also forecast to show a contraction from an annualized 672,000 in April to 648,000 last month. The ending of a $8,000 tax break for buyers at the end of April will cool buyers for the rest of the year. Without a housing recovery the domestic economy will remain depressed.

Meanwhile, the very modest recovery in US manufacturing output has been characterized mainly as inventory rebuilding after the sudden shock of the recession to orders, and this is now threatened by the surging dollar. The trade deficit for April was up 0.6 per cent to $40.3 billion.

Unemployment has remained stubbornly high with manufacturers slow to hire new workers, and the vast majority of new employment is coming from government programs.

It is hard to see how the manufacturing sector can move from an inventory restocking recovery to a more expansive stage with a high dollar hampering export growth and the global recovery only evident in Asia and not Europe.

Exporters face a double whammy in lower profits after earnings are translated from euros to dollars, and falling demand in the key euro zone export market.

New normal

How long it will take Wall Street to recalibrate stock prices to this ‘new normal’ as Bill Gross of Pimco terms it, remains to be seen. Certainly the falls of June suggest that stock market investors are beginning to see a rather different future than the rapid recovery that had been priced into equities.

Usually when the penny finally drops in stock markets there is a trigger or catalyst that sets it off. That could be some unexpected geopolitical event or natural disaster.

Or there can be a sudden realization that the emperor is not wearing any clothes. The US economic recovery being revealed as a nonsense would fall into that category.