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US has an inventory problem, says Bernanke... - Views on News from Equitymaster
 
 
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  • Jul 19, 2007

    US has an inventory problem, says Bernanke...

    The US Federal Reserve Chairman, Ben Bernanke does seem to be a worried man. His view on the US housing crisis and rising energy prices suggest so. In his testimony to the US House Financial Services Committee, consisting of the country's policymakers.

    He has warned of the decline in the housing market, and has also raised concerns on the rising crude oil prices (US light crude has hit US$ 75 per barrel). These two factors are what he considers as the biggest threats to sustenance of growth in the US economy.

    Especially on the US housing market, he has indicated that "over the past year, home sales and construction have slowed substantially and house prices have decelerated. Although a leveling-off of home sales in the second half of 2006 suggested some tentative stabilisation of housing demand, sales have softened further this year, leading the number of unsold new homes in builders' inventories to rise further relative to the pace of new home sales. Accordingly, construction of new homes has sunk further. The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates."

    Despite these concerns, Bernanke remains upbeat on the broader US economic scenario and expects GDP growth to average around 2.2% to 2.5% in 2007, and increase to 2.5% to 3.0% in the next year. He has, however, maintained that the upside risks to inflation remain the Federal Reserve's primary policy concerns considering that "the ongoing housing correction could prove larger than anticipated, and energy and commodity prices could continue to rise sharply" and that could "spread to other parts of the economy."

    The vibes emanating from the Fed Chairman sound of warning bells for global policymakers, which are fighting hard to defeat the demon of rising inflation levels on the back of higher crude prices. The Indian central bank policymakers are also toeing this line of inflation control and growth management, as seen from the rise in cost of borrowings over the past few months. Bankers however feel that this rise in interest costs has the ability to dampen the economy's growth prospects as it can slow investment and consumption demand for capital. The effect has already been seen in the April to June 2007 quarter, wherein credit growth slowed down to 24% YoY in 1QFY08 from 29% YoY levels seen in the last fiscal.

    We believe that there might be a blip on the investment horizon over the next six to eight months because of the increase in interest rates over the past few months. This breather is wanted, as the Indian economy will fare better for it with the money flows into potentially more viable investments taking precedence over the more fickle segments.

     

     

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