Why poor Americans have stopped buying houses

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Let's start with the good news.

The US third-quarter estimate for GDP growth has been revised up from 1.6% to 2.2%. That's better than expected although still lower than most original forecasts and a sign that the bottom hasn't dropped out of the economy yet. But that's pretty much it for the good news. Everywhere else, things are looking rather bleak. Take new homes sales: the annualised rate for October was a whisker over one million, down 3.2% from September and a staggering 25% decline year-on-year.

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Some commentators were cheered by a rise in prices month-on-month, arguing that it suggests the market is stabilising. Their logic is that sales may still be dropping, but at least builders are no longer having to slash prices to make those sales.

But a quick look at the raw data shows that the average price only rose because the majority of the lost sales were in lower-end properties. The conclusion? Rich Americans are still buying real estate, but most of their less-affluent compatriots have suddenly become rather less keen. And housing isn't the only place we see that disparity

Despite a lot of hyperbole over buoyant Thanksgiving weekend shopping which was based on some very dodgy data from the National Retail Federation large retailers seem to have had a miserable November. For example, Wal-Mart posted a -0.1% decline year-on-year in like-for-like sales. Wal-Mart does have some specific problems - it seems to have botched a recent store redesign - but most of the firms reporting so far have missed sales forecasts for this month.

But it's the breakdown between different types of stores that tells the big story. The main exceptions seem to be the upscale shops such as Tiffany's, which reported a +23% rise in third-quarter profits and is very bullish on sales for the rest of this year.

There's nothing strange about this. Over the last few years, most of the salary gains have gone to the top end of the workforce. Lower earners are struggling their wages have barely kept pace with inflation. The bulk of consumers have financed their spending by dipping into savings and/or borrowing against the value of their houses.

With the housing market seemingly in freefall, mortgage equity withdrawal starts looking very unattractive. If US consumers are to continue spending, their incomes will need to rise. Until recently, there had been some encouraging signs that incomes had started to pick up strongly from the start of this year. But the latest revisions seem to have put paid to that theory. Real disposable incomes in the second quarter are now reckoned to have fallen 1.5% at an annualised rate, instead of rising 1.7% as previously estimated.

More recent figures suggest that incomes may finally be rising, but that consumers are -shockingly - saving much of this windfall instead of blowing it all on a new 42-inch plasma TV. Well, we say saving', but what we really mean is that they're looting their savings less feverishly than a few months ago. The personal savings rate which should probably be renamed the dis-savings rate improved to -0.6% in October, from -1.7% as recently as July. Yes, those are minus signs and have been now for 19 straight months.

Still, that small step towards financial responsibility explains why consumption is flat over the last two months (the much-trumpeted October increase was offset by a downward revision to September). This may be the first sign that hitherto-tireless US shoppers are finally losing enthusiasm for their credit-fuelled spending spree.

Meanwhile, a steady drip-feed of indicators points to weakening in the rest of the economy too. For example, yesterday's Chicago Purchasing Managers' index dipped below 50, the lowest since April 2003, signaling that the manufacturing sector in the region saw business contract this month. More significantly, durable goods orders and shipments for October were very soft, suggesting that the business investment boom that looks vital if the US is to avoid a severe slowdown has yet to begin.

If that boom eventually gets underway, it will probably be down to Microsoft. Around half of US business investment goes on IT, so the release of its new Windows Vista operating system (OS) yesterday could spark a major spending cycle.

But that's a big if. Last time round, plenty of people who switched to the new OS immediately had huge problems with it. The signs are many will wait several months to see if the system is stable before upgrading. The fact that a lot of important third-party equipment and software is reported still to be incompatible with Vista is another reason to wait. So we're definitely not betting on business riding to the rescue if the consumer falters.

This gloomy data may help explain why the US dollar has suddenly tanked in recent days, hitting a 14-year low against sterling. Despite Ben Bernanke's hawkish talk about inflation being the biggest threat, currency markets seem to believe that he'll need to ease rates soon in a bid to avert recession. Since a reasonable interest rate is one of the few things holding up the dollar, that makes owning it a no-win proposition (unless you're a central bank trying to hold down your own country's currency against the dollar).

All this puts Bernanke in a tight spot. Holding rates steady might make the looming slowdown/recession worse. Cutting them could send the dollar tumbling. Quite possibly, both will happen regardless of what the Fed does. Bernanke must be cursing the day he took over from Alan Greenspan (see Alan Greenspan: the savings saboteur for more) - and we imagine he won't be the only American cursing 'the Maestro' in the months to come.

Turning to the markets

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In London, the FTSE 100 was boosted by Wall Street gains and strength among pharmas to close 58 points higher, at 6,084. Software company Sage led the blue-chips higher, climbing over 7% on good full year results. For a full market report, see: London market close

Elsewhere in Europe, stocks also tracked Wall Street gains. The Paris CAC-40 closed 75 points higher, at 5,381. In Frankfurt, the DAX-30 closed 82 points higher, at 6,363.

Across the Atlantic, stocks rallied on positive economic data. The Commerce Department reported that third-quarter growth was higher than predicted, whilst inflation came in lower than expected. The Dow Jones closed 92 points higher, at 12,227, with Intel and Verizon putting in strong performances. The S&P 500 ended the day 12 points higher, at 1,398, whilst the Nasdaq was 17 points higher, at 2,430.

In Asia, the Nikkei was also boosted by the strong US GDP data. The index gained 198 points to end the day at 16,274.

The price of crude oil climbed sharply higher yesterday, almost hitting a two-month high, but had fallen slightly to $62.34 this morning. In London, Brent spot had fallen nearly 2% to $61.73 today.

Spot gold had risen to $636.90 this morning, whilst silver was trading at $13.58 an ounce.

And in London this morning, home improvement retailer Kingfisher announced a 10% rise in third-quarter profit on the back of job cuts and closure of unprofitable stores in its B&Q chain. However, a programme to revamp stores will lead to a 'short-term impact on profitability', according to Finance Director Duncan Tatton-Brown. Kingfisher shares were down by as much as 2.2% this morning.

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