No more quick fixes for US economy in rehab

Via T-19

Avert your eyes for a moment from the weak UK economic data and look at what we've learned about the US in the last couple of days. House prices have fallen 4.2% since the start of the year, meaning the 33% tumble from the 2006 peak is greater than the 31% decline seen during the Great Depression. The manufacturing sector appears to have stalled, with the purchasing managers' index at its lowest level this year. And private-sector jobs are being created at the slowest rate since last September. It looks – just as the bears predicted – as if the US economy is struggling to cope with the end of quantitative easing (QE).

Send for more stimulants then? That's what happened last year – QE2 was launched in response to similarly discouraging data. But QE3 looks unlikely. The world, and US politics, has moved on. Standard & Poor's may have been guilty of alarmism in warning about the negative outlook for US debt but the rating agency has stirred the debate in Washington about the relative merits of spending cuts and tax increases. QE3 would sit uneasily with a political mood of belt-tightening. Sceptics in Congress would argue (with some justification) that the law of diminishing returns had already set in – a $600bn (£365bn) programme over the past eight months produced annualised growth of only 1.8% in the first quarter.

The US, then, is short of tools. If both fiscal and monetary stimulus are ruled out, a weaker dollar might provide some oomph. But a weak dollar requires other currencies to be strong. True, the euro sits at a four-week high against the dollar, but who knows how currency markets will react to the next act of the Greek sovereign debt crisis?

In the end, the likeliest source of stimulation may be lower commodity prices to give relief to consumers being squeezed by higher food and energy prices. Brent crude has fallen from its highs of $125 a barrel in April to $114. That's a start, but another $40 fall might be needed to deliver a kick that would be felt by consumers. And $75 oil would probably require the US economy to become a lot weaker yet. This looks a very long haul – which is the message conveyed by 10-year yields on US treasury notes falling below 3%.

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