38 / 240
EuroWire – March 2008
36
Transat lant ic Cable
The economy
US manufacturing ended 2007
at its weakest in nearly five years
The manufacturing index of the Institute for Supply Management,
which had already slipped markedly over the second half of last
year, dropped further to 47.7 in December. This was its lowest
level since April 2003. A reading below 50 indicates expansion
in the economy; below 50, contraction. A falling-off in new
orders for the month also hinted at softening demand, even as
companies paid higher prices for their materials. The shrinkage
in factory production for the first time in nearly a year fanned
concern that the economy may be headed for recession.
These fears are exacerbated by the most severe housing slump in
more than a decade. And credit markets have been experiencing
turmoil as the crisis that began in with defaults on sub-prime
mortgages spread into other areas of finance.
Norbert Ore, chairman of the ISM manufacturing business
survey committee, did not minimise the implicit threat of a
greater impact on the broader economy.
“Manufacturing leads the rest of the economy,”Mr Ore said.
If credit problems worsen,
how much longer can consumer spending
keep the US economic expansion going?
The year 2007 saw a number of shocks delivered to the
American economy. Job growth slowed. Inflation fears grew.
Oil prices soared. Mortgage debt became a major problem.
Banks tightened their credit requirements. Still, consumers kept
spending, companies compensated for weakness at home with
higher sales abroad, and the economy continued to expand.
The question now becomes, howmuch longer can it be expected
to withstand the assaults?
The major, closely related, worry points – the burst housing
bubble, a wave of foreclosures, and tight credit – are holdovers
from 2006 and 2007. Easy credit and speculation produced a glut
of 2.1 million vacant, unsold houses – about 2.6% of the nation’s
housing stock. But the whittling-down to normal levels of this
inventory of unsold properties faces a new challenge, perhaps
distinctive to 2008.
As of November of last year, nearly one-quarter of the loans
extended to homeowners with weak credit were in default. The
trouble in the mortgage market, while bad enough, was largely
confined to these sub-prime loans. Now, however, there appears
to be a strong possibility that foreclosures will spread to people
with good credit – good enough, that is, for ordinary times.
Writing in the
New York Times
, Peter S Goodman and Vikas Bajaj
note that default rates on loans to homeowners with relatively
good credit, while still low, are rising sharply. In November,
6.6% of so-called Alt-A home loans – those considered somewhat
less risky than sub-prime – were either delinquent by at least
60 days, in foreclosure, or had been repossessed. That was up
from 4.3% in August. (‘In the Land of Many Ifs,’ 2
nd
January).
The article warns: “This is a potentially ominous sign, because
sub-prime and Alt-A mortgages issued in 2006 together made
up about 40% of all mortgages. Like many of the sub-prime loans
that have landed in trouble, Alt-A loans often begin with a low
introductory interest rate that later escalates.”
The
Times
reporters point out that the spike in foreclosures is
happening even before many mortgages have reset to higher
rates, suggesting that borrowers are falling behind because their
properties are worth less. Many are having trouble refinancing as
banks tighten lending standards.
Taken together, these indications have economists expecting
national housing prices to fall by 5- to 10% more in 2008,
and perhaps into 2009 as well, before hitting bottom. Messrs
Goodman and Bajaj note that such a drop could ripple out
to the broader economy by depressing consumer spending,
which accounts for about 70% of all economic activity.
Bernard Connolly, chief global strategist at Banque AIG in
London, told the
Times
, “It’s almost inconceivable that there
won’t be severe constraints on the US consumer economy.”
The talent crisis
Making the case for reform of US
treatment of immigrants with high skills
“Americans entering the workforce today barely make the global
top ten.America is no longer a skills-abundant country compared
with an increasing share of the rest of the world. As a result, in
the coming decade America could face broad and substantial
skills shortages.” These are the stark conclusions of Jacob Funk
Kirkegaard, a Danish-born research associate at the Washington-
based Peterson Institute for International Economics and author
of ‘The Accelerating Decline in America’s High-Skilled Workforce:
Implications for Immigration Policy,’ published by the institute.
Mr Kirkegaard asserts that America rose to economic prominence
on the shoulders of the most highly skilled workforce in the
world. However, he writes, over the last 30 years skill levels in
the US workforce have ‘stagnated.’ That is, as the current crop of
American workers retire, they will take as many skills with them
as their children bring into the workforce.What is more, remedial
efforts – even if implemented now – will produce more high-
skilled Americans only in the long term.
In Mr Kirkegaard’s view, the US in the short to medium term
will increasingly need foreign high-skilled workers. The country
therefore must reform its immigration policies and procedures
not only to welcome high-skilled workers from overseas, but also
to make it easier for them to stay.
For America to regain its leadership in global talent,
Mr Kirkegaard urgently recommends reform of US high-skilled
immigration programmes, particularly the H-1B temporary work
visa and legal permanent resident (green card) programmes.
More than 90% of green cards are issued by way of adjustment-
of-status (eg, from H-1B temporary worker to legal permanent
❈