Saturday, 21 February 2009

U.S. Economy: Factory Output, Housing Starts Plunge

Manufacturing and housing in the U.S. collapsed in January, government reports showed, as the Obama administration unveiled new proposals to stem what may become the worst recession in the postwar era.

The Federal Reserve’s industrial production index dropped 1.8 percent to 101.3, the lowest level in more than five years, the central bank reported today in Washington. Housing starts plunged 17 percent to an annual rate of 466,000, the fewest since records began in 1959, Commerce Department data showed.

General Motors Corp. has asked for new loans and said it plans to cut 47,000 more jobs worldwide as sales plunge, while builders struggle to trim the glut of homes propelled by the surge in foreclosures. President Barack Obama pledged $275 billion in a program that includes cutting mortgage payments and encourages loan modifications to keep Americans in their homes, and Fed policy makers lowered growth forecasts.

“The recession news could hardly have been worse,” said Roger Kubarych, chief U.S. economist at UniCredit Global Research in New York. “There is no evidence whatsoever that the U.S. downturn is close to bottoming, whether in hard-hit manufacturing or in the housing sector.”

The destruction of artificial wealth created by all the recent bubbles continues. People and businesses (including the banks) borrowed more than they could afford and now it's unraveling. Just taking the ordinary American consumer for example, the driver of their economy, on average, such people with relatively low incomes can only afford so much. The glut of spending on housing and expensive goods using the equity in their home loans is now sinking the ship. What's worse is the banks foolishly loaned the money in the first place and then leveraged the debt they had and on-sold this to each other for billions and billions. Now all this created wealth is being revealed as fictitious and worthless with the whole house of cards coming apart.

The problem with the "throwing cash at the problem" aspect of the bailouts is that they are trying to prop up prices that cannot be sustained by the existing level of REAL WEALTH. The prices will have to come down to what people can afford. However, with less jobs and a glut of houses, prices are set to come way down leaving people with homes having massive negative equity. A disaster.

And take note; the situation appears set to continue for some time. The solution, pointed out by many, should centre on new and/or re-invigorated industries and job creation (jobs that pay a decent wage).

[Posted at the SpookyWeather blog, February 21st, 2009.]

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