EoW March 2008

Transat lant ic Cable

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.” ❈ “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 The talent crisis Making the case for reform of US treatment of immigrants with high skills

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. 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 “Manufacturing leads the rest of the economy,”Mr Ore said.

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EuroWire – March 2008