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Friday 19 September 2014

Fears spending slump will extend downturn

Published 11/12/2008 | 00:00

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The biggest slump in US consumer spending since 1942 will extend the recession and push the jobless rate to the highest level in a quarter century, according to economists surveyed by Bloomberg News.

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And a separate report predicts it will take over a decade for US house prices to return to their October 2005 peak.

London analysts Lombard Street Research said US households would not begin to borrow and spend again until debt returned to manageable levels, which they see as a fall of about 17pc from present borrowings.

Analyst Gabriel Stein said previous housing slumps have been taking longer to recover. "In the early 1970s, it took over two years for real house prices to return to peak levels, nearly seven years in the early 1980s, and more than nine years in the 1990s," he said.

But the need to reduce household debt means this downturn is "structural" and prices will take even longer to reach previous peaks in real terms.

This also means the US finance industry is likely to shrink substantially, as demand for credit will stay very weak for a long time, Mr Stein says.

The Bloomberg survey found a median prediction among 51 economists that US household spending will drop 1pc in 2009, the biggest decline since after the attack on Pearl Harbour.

By the middle of next year, the economy will have shrunk for a record four consecutive quarters, the survey found.

"That sounds scary enough to me," said Jeffrey Frankel, a Harvard University professor. "Consumers have carried the weight of expanding demand for a long time at the expense of a serious deterioration of their balance sheets."

A drop in spending has brought the car industry to the brink of collapse. Mounting unemployment, a lack of credit, and falling property and stock values will prompt Americans to turn even more frugal.

But President-elect Barack Obama has pledged to pursue the biggest public-works plan since the 1950s to help stem the economic slump.

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