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11 December 2006

Buying into a recession

America's annual spending frenzy is under way and even sub-zero temperatures won't stop people campi

By Andrew Stephen

I spent Thanksgiving this year in Alaska, and it was very, very cold. The temperature never rose above minus 20°C, and while I was there, an 18-year-old was fatally struck down by hypothermia yards from his house and a few blocks from where I was staying.

But that did not stop Alaska – a slab of frozen land twice the size of Texas that did not become part of the United States until 1959, and whose territory is nearer Russia than to the continental US – from indulging in a peculiarly American post-Thanksgiving phenomenon. Thanksgiving is always on a Thursday and is followed by what is known as “Black Friday” – the day when America plunges into pre-Christmas shopping and puts all the stores back into the black after summer doldrums of trading in the red.

Sure enough, Alaskan lunatics started camping outside stores such as Best Buy – the nation’s biggest electronics retailer – at 7pm on Thanksgiving. Shoppers were not allowed to set up seats, not even when the temperature dipped to as low as minus 27°C during the night, so people such as Harriet Harris and husband, Darrell, settled down on the ground in (extremely thick) sleeping bags. They finally left with their loot: a 50-inch plasma TV and a computer, saving themselves $2,000.

Equally predictably, “Shopping Frenzy” headlines proliferated all over the American press. The National Retail Federation predicts that this year’s holiday sales will be around $457.4 billion – a record, of course, as it always is. No fewer than 140 million shoppers, we were told, spent an average of $360.15 each on Black Friday, up 18.9 per cent on last year’s $302.81. Clothing and accessories were the most popular items (41.4 per cent), followed by CDs, DVDs, videos and video games (grouped together, also at 41.4 per cent).

Shopaholic consumerism, you might assume, is in full swing. Yet the dollar has plummeted 12.5 per cent against the euro this year and 14.9 per cent against the pound – but (more significantly, which I will explain later), it has lost just 5 per cent against the Chinese yuan in the past 18 months. We all now know that, as a result, the pound is teetering on the brink of being worth $2 – and that British Airways has put on four extra daily flights to New York alone to cope with Brits flying in to snap up cheap goods.

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So what is going on? To say the signals about the future of the US economy are mixed is to put it mildly – but history shows that such confusion and conflicting evidence invariably precede a recession. Poor Dubbya, increasingly obsessed with what he still sees as the glorious place he will occupy in US history, is now likely to leave a declining economy as well as the ruins of Afghanistan and Iraq as his legacy.

I first discovered that reading the tea leaves of the US economy is difficult many years ago, when I spoke to Alan Greenspan, the legendary chairman of the Federal Reserve appointed by Ronald Reagan in 1987. Greenspan retired only this January, just before his 80th birthday. He is a fixture at Georgetown parties, and I always felt it my duty to ask him about the future of the dollar. Fifteen minutes later I would walk away completely befuddled. Much later I learned that the only person in the world who understands a word Alan Greenspan says is Greenspan himself (and even then I sometimes have my doubts).

His successor, Ben Bernanke, 53 this month, is very different. He addressed the National Italian American Foundation in New York City on 28 November, starting his speech with the optimistic words: “This month marks the fifth anniversary of the beginning of the current expansion.” He did allow a brief allusion to a “de celeration in economic activity currently under way”, but pronounced that, “over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy’s long-run sustainable pace”.

Bernanke, however, has the same rosy certitude as any member of the Bush administration – which I do not mean as a compliment. He quoted figures showing GDP had increased at an annual rate of 2.6 per cent in the second quarter of 2006 and at 1.6 per cent in the third. Indeed, stocks actually rallied the next day when the US Treasury revised that 1.6 per cent figure to 2.2 per cent.

But, mysteriously, Greenspan’s successor hurriedly sneaked out through a side door that day in Manhattan without taking questions. Perhaps he knew that the US Census Bureau would be announcing simultaneously that orders for dur able goods had fallen 8.3 per cent in October, and that although the trends of the second and third quarters were still heading upward, they contrasted with first-quarter growth of 5.6 per cent. “It takes a sunny disposition to share the Fed chairman’s view,” says Peter Coy, economics editor of Business Week.

So, although the media reported frenzied purchases of televisions and Xbox games, the stores have actually been left with what economists call “inventory accumulation” – more goods on the shelves than those flying off them. Loss leaders such as cheap flat-screen TVs are selling, but buyers coming to the stores to snap them up are then tending to ignore the more profit-geared goods they were intended to buy as well.

Bernanke even told his audience that “the motor vehicle sector may already be showing signs of strengthening” – but the truth is that Ford sold 9.6 per cent fewer vehicles in November than in the same month last year, falling behind Toyota’s US sales for the second time in five months. Nearly 70 per cent of US goods are transported by road, but a few days ago the American Trucking Association reported that the tonnage of goods carried is at its lowest since February 2001. Even Wal-Mart’s profits are actually down 0.23 per cent – and 1.8 million federal government workers, if current proposals go through, will in 2007 get their smallest pay rise for 18 years. Meanwhile, US companies such as General Motors, Ford and Intel are laying off thousands.

But there are two even more telling pointers to why the likes of Dr Nouriel Roubini, professor of economics at New York University and a former senior adviser at the US Treasury, believe the US economy is already in a recession. First, the Institute for Supply Manufacturing says its domestic manufacturing index fell from 51.2 per cent to 49.5 in October, when it had been expected to rise to 51.5. Ever since the Sixties, an ISM figure under 50 per cent has signalled a recession.

Second, even Bernanke concedes that house prices are dropping alarmingly – and it has largely been the housing boom that has kept the US economy buoyant in recent years. Median prices for homes are 3.5 per cent lower than they were this time last year: that is the most dramatic drop since the National Association of Realtors started keeping such statistics in 1968.

Yet the Bush administration is as gung-ho about the economy as it is about Iraq. The stock market is a notoriously poor indicator of the future of the economy, but the Bushites say gleefully that the Dow is up 13.7 so far this year, the S&P 500 by 11.89, and Nasdaq 9.43; shareholders can fiddle, you see, while America and Iraq burn. Unemployment, the Bush camp also points out, dropped to 4.4 per cent in October – its lowest level since May 2001. Donald Kohn, Bernan ke’s dep uty, was none the less wheeled out this month to say that although “our expectations [are] for a gradual decrease” in inflation, “the risks around that expectation are still tilted to the upside” – Greenspanesque lingo for saying that the Federal Reserve may soon raise interest rates.

It is too simplistic, however, to interpret all this to mean that the US economy is helplessly on the skids. Bernanke and Kohn will be leading a deputation to Beijing on 14 December with no fewer than five cabinet members; there is nothing they would like to see more than the dollar fall against a floating yuan.

The US is running an annual trade deficit of nearly $1trn, a significant proportion of this is as a result of Chinese sweatshops and an artificially valued yuan – which results in stores such as Wal-Mart being able to sell DVD players for $14. (I bought a pair of leather shoes last week for $17; it didn’t occur to me until later to won-der where they came from. I looked under the tongues of the shoes and there were those familiar words: “Made in China”.)

The likes of Bernanke and Kohn, therefore, are in a Bushian mindset that, if only they can persuade the devilish Chinese to mend their ways and revalue the yuan, all will be well with the dollar. A 10 per cent revaluation, however, would cause a 10 per cent rise in prices at Wal-Mart – a trend that might not delight American consumers who like their $14 DVD players and $17 shoes. China has been furiously beavering away while the US has basked in the complacency of the Clinton and Bush years: it has amassed $1trn in foreign exchange through its cheap exports, $700bn of it in dollars.

None of which is good news for the US economy. Americans are second to none in their advocation of free enterprise – until, that is, they find themselves being battered by international economic systems they do not like. The greed for cheap consumer goods – and, yes, after buying £8.65 worth of shoes I don’t claim any moral superiority – has rebounded on them. Poor Mexicans, meanwhile, are taking on menial jobs at wages too low to attract Americans.

Increasingly in my travels I see that the parlous state of the US economy is leading to a generalised anger in American society; in the polls for the 2006 midterm elections, economic fears predominated. Americans are as mad as hell and they’re not going to take it any more – but at whom can they lash out? The Chinese churning out the DVD players they want so much, the Indians manning US company helplines, the Mexicans mowing their lawns? The answer is all three, and Muslims, too. But worry not: the sure hand of George W Bush will be on the rudder for (as I write this on 3 December and consult my countdown clock) another 778 days, three hours, 15 minutes and 22.3 seconds. Happy Christmas.