The deepening recession in the housing market, with a 17% fall in residential property investment, cancelled out any positive effects from the fall in energy prices. Consumer spending, still the mainspring of growth, remained quite strong (3.1% annualized rate), but working families are more in debt than ever.

In contrast, Bush propagandists were boasting about record stock market highs in October - the result, they claimed, of their tax cuts for the super-rich. True, the Dow Jones surpassed its January 2000 bubble peak. But adjusted for inflation, it is still more than 15% down. It would have to rise over 2,300 points to set a new inflation-adjusted record.

The S&P 500, based on a much broader range of company shares, is about 10% down from its 2000 peak in nominal terms and more than 25% down after adjusting for inflation.

In any case, new stock-exchange peaks will bring little or no comfort to the majority of working families. Only a third of households have stock holdings worth more than $5,000 (2004 data). The wealthiest 10% of households own 80% of all stocks, while the bottom 90% own just 20%, mostly through retirement plans.

Housing Bubble
The main cause of the recent slowdown is the gathering collapse of the housing market. In the mid-1990s, the U.S. developed an enormous housing bubble fuelled by an abundance of cheap credit. Nationally, house prices rose 70% more than prices in general (historically, they tend to rise at the same rate), and even more in “hot spots” like Boston and San Francisco.

As a result of the bubble, housing pumped an additional $5 trillion of extra paper wealth into the economy. Like the stock-exchange bubble of the late-1990s, the housing bubble raised the level of consumer spending. In fact, it had an even greater impact because the “wealth effect” from housing has involved much broader layers of the population.

Many families have used their homes like ATM machines, borrowing against rising values. In recent years, they have been “cashing out” about $700 billion annually. This process is now coming to an end. Interest rate raises by the Federal Reserve (the benchmark rate is up from 1% in 2003 to 5.25% this year) are making home loans more expensive and pushing house prices down. More and more families will find themselves in difficulties. Already, there has been a sharp rise in delinquencies (arrears over 60 days) and foreclosures.

Sales of new homes have slowed down, sustained only by big discounts and other incentives to buyers. Sales of existing homes have fallen quite sharply, too. This will impact investment and employment, with further knock-on effects. Between 2001 and 2006, construction and related sectors (building materials, furniture, real estate finance, etc.) accounted for 69% of private-sector job creation.

In the news media, there is plenty of reassuring talk about the housing market “bottoming out,” but this is contradicted by actual trends. University of Maryland economist Peter Morici comments: “The speculative frenzy of recent years is causing a major adjustment, and the happy talk of realtors is prolonging the process. The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses, like any other asset, can be overpriced… things are likely to get worse before they get better.” (“Record Drop in Home Prices”, Washington Post, 10/26/06)

The housing market is different from the stock market. While stocks are liable to crash suddenly, housing tends to decline more slowly. Existing homeowners sit tight, hoping that prices will recover.

Nevertheless, all the signs are that housing has entered a serious recession and is far from having reached the bottom. Even a “soft landing” for housing will depress consumer spending and might well push the whole economy into recession. But a “hard landing” could cause a lot of collateral damage with construction-sector bankruptcies and turmoil among over-extended mortgage lenders.

Mounting Debt Burden
Imports into the U.S. continued to grow faster (7.8%) than exports (6.5%) in the third quarter, raising the annualized trade deficit to yet another record high of $810 billion (6.1% of GDP). Recurring deficits have to be financed by a massive inflow of money into the country. This takes the form of overseas investors buying property or financial assets in the U.S.

Increasingly, it has been foreign governments buying U.S. government bonds. In particular, China, Japan, and other East Asian exporters who have trade surpluses with the U.S. have felt compelled to sustain the U.S. economy as a crucial market for their exports. As a result of this process, U.S. capitalism has an accumulated debt of $2.69 trillion to the rest of the world.

This unprecedented relationship between U.S. capitalism and a powerful clutch of Asian exporters has lasted for an extraordinary long time. But it cannot last forever. At some point, a downturn in the U.S. economy – or a financial crisis – will trigger a sharp fall in the value of the dollar against major currencies.

China, Japan, etc. have a vested interest in sustaining U.S. economic growth. But at a certain point, they will no longer be able to prevent a breakneck slide of the dollar despite their massive reserves. They will accept some losses to sustain their U.S. markets, but are unlikely to allow the value of their U.S. assets to be wiped out by a massive devaluation of the dollar. Sooner or later, like private speculators, they will sell their dollar assets, thus accelerating the fall of the greenback.

For over 25 years, the U.S. capitalist class has been steadily intensifying the exploitation of U.S. workers (as well as workers internationally). Under Clinton and especially Bush, big business has enjoyed unrestrained free-market policies, which have resulted in a shameless profits bonanza. Yet economically, U.S. capitalism is not in a strong position. Its short-sighted profits orgy has undermined its own foundations, and the system faces a future of economic crisis and political upheaval.

At the end of 2005, corporate profits as a share of GDP matched the previous peak level of 1968, at the height of the post-war economic upswing. Since the peak of the last business cycle (first quarter 2001), the share of national wealth going to corporate profits has risen by 3.9% while the share going to labor compensation (wages and benefits) has fallen by 1.4%.

No wonder working families are increasingly relying on debt to compensate for falling income from wages and salaries. The average household debt is now 129% of disposable (after-tax) income, an all-time high.

Virtually none of the productivity gains (increased output per worker per hour) of the last five years have been passed on to workers. Average inflation-adjusted weekly earnings this summer were almost identical to those in March 2001.

The first Forbes list published in 1982 contained only 13 billionaires. Twenty-five years ago, the richest Americans were subject to a marginal tax rate of 60% (leaving aside avoidance and evasion). Today, they keep much more of their wealth as the effective top tax rate has been reduced to 35%.

In contrast, over one-fifth of children in the U.S. live in poverty (2000 data) even after government intervention.