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Investment view

With the UK stockmarket undecided as to which side of the 4,000 level it feels most comfortable on, last week was a time to search for good news. There was not a lot of it to be found. Aside from the shine fading from BP and Lord Browne, Diageo&#39s trading statement was enough to drive you to drink. The smell of disappointment was in the air – and nowhere more so than with American consumers.

The rapid expansion of the US economy during the second half of the 1990s was built in no small measure on the American consumer&#39s propensity to spend. The conference board index, published last week, is a closely followed measure of what the American consumer might be getting up to in the months ahead. The index fell to a nine-year low, suggesting that worries over continuing poor stockmarket performance and rising unemployment are starting to bite. This does not augur well for the rest of the world.

It is perhaps remarkable that confidence has held up as well as it has, given the uncertain economic outlook and the damage to personal wealth wrought by the collapse of the technology boom and a possible war in the Middle East. It has been the robust state of the housing market that has kept the cash registers ringing on both sides of the Atlantic. Mortgage refinancing has been big business but there is a limit to how long that can continue.

Alan Greenspan recognises the importance of the housing market. In a testimony to Congress recently he remarked that the propensity to spend part of the rise in the value of one&#39s home was greater than that of using increased stockmarket wealth. But when you are losing more in the stockmarket than you are gaining from the rise in house values, there is a limit to how long you might be prepared to maintain your level of spending.

An economist who previously worked for the Federal Reserve Bank but is now in the employ of a major American fund management group has estimated that the fall in the stockmarket has wiped $8,000bn from household wealth over the past two and a half years.

The rise in the value of personal housing over the same period has probably compensated to the extent of one-third of that loss but the reality is that Middle America is much poorer than at the start of the new millennium. It is against that background that consumer confidence is beginning to crack.

This week, of course, the Federal Reserve Bank meets to set interest rates – and the lack of manoeuvrability the committee enjoys will become very apparent. Even in this country, the focus of attention has moved away from the rising level of house prices to what action the Bank of England might take to keep consumers spending. In this country, too, concerns are beginning to surface.

Among surveys published recently was one suggesting that housing in this country is now as expensive as it was in 1989 in relation to earnings. Then, we suffered a severe bear market in residential property, with around one-third wiped off the value of the average house in the South-east in short order.

More important, it took several years for this market to recover its poise, with sluggish economic conditions contributing to an unwillingness for people to move and negative equity becoming part of the landscape. Could a similar situation be developing now?

The property boom started in London and the South-east but then spread throughout the rest of the country. There are clear signs that boom times are past in London, with the difficult period through which the financial services industry is travelling having a direct impact upon demand. While this may be of less relevance to those buying their homes in Cornwall or Cumbria, it would be unwise to underestimate the ripple effect that could travel out from London.

But it is not all doom and gloom. There are signs that productivity in the US is being rebuilt – perhaps as a consequence of the downsizing of the workforce. So far, there is every reason to believe this will translate into improved profitability – heaven knows, we need it. But pricing power remains notoriously absent – and it is unlikely to return if consumers go to ground. Roll on Christmas.


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