On Feb 17th Fed showed some signs of real growth in the US economy. That has been long due without any doubt. I finally see some sighs of relief around me.
- The manufacturing index went up by 1% in January showing sixth straight months of increase.
- Housing Construction has also gone up by 2.8% in January.
There is one thing which is very different than the past. All these factors increasing essentially means true growth, a true growth in GDP. This is the time when the US consumers are getting de-leveraged. Still not sure what that means? Read on:
US Growth Was not Real Before 2008-2009 Recession
A big reason for the recession in US was that US had become an economy of consumption rather than production. It had stopped manufacturing and was only consuming more and more finished goods by leveraging itself more. Meaning people kept on taking more and more debt to buy goods. Although it appeared as if economy was growing, the growth was not real. It was not based on actual GDP increase!
US forgot that Debt was a liability?!
That is the most important thing my Dad taught me when I was a kid. My Dad told me that no matter how cheap the loan is, loan is a freaking loan after all. If you are buying stuff / availing some services using loans, you are essentially spending what you do not have. Whenever that happens, you are getting yourself in a ditch that you got to figure out how to get out of, sooner, than later! How could our entire nation forget that?
In the last 6 month we have seen a constant decline in total revolving consumer debt. Both secured as well as unsecured debt taken by US consumers has gone down. Meanwhile in the same time the NY Fed has reported that their manufacturing index went up by 9 points in February to 24.9 from 15.9 . Surveys done by Bloomberg had indicated the index to be at 18. A positive number indicates that the sector is growing while a negative indicates contraction. The economy had seen the number to be at 4.5 in December and negative in Summer 09. None of this has been occurring before because people were taking more debt, but now it is a real positive sign. Another positive indicator for manufacturing growth was seen in January when Fed reported 0.7 percent jump in sectors of Mining and utilities. Both sectors are essential for growth of manufacturing.
The other positive sign was growth in housing construction. In early 2007 the housing market bubble busted. The home prices started declining. People started foreclosing their houses and new house sales went down both because of unemployment as well as lack of credit availability. Hence construction companies had to halt new construction activity since there was already a large inventory in market. In January housing construction grew up 2.8% to the highest levels in last 6 months.
The above two factors instill confidence in economist that unemployment rates might start going down if not in 2010 but definitely early 2011. The US GDP is expected to grow at 3.25% this year and since most of this growth is expected in sectors like construction and manufacturing, it is positive indicator for long term growth in US. However in all the good news we just discussed, there is one black spot still left. Yes you are absolutely right, gigantic debt! The amount of debt US has been holding in 2010. US total debt has risen to $13 trillion. Countries especially Germany and Japan ended up buying about $60 billion in additional US treasury notes leading to additional debt on the economy. The biggest worry for the Fed right now is that whether this could led to an inflation and hence very tough times for US ahead. Think over it and I will come back with my analysis with that soon!
