The big story in the US is that this is where the subprime meltdown began.  Risky lending has resulted in a high proportion of defaults, rising bankruptcies, job losses and share market volatility.  In an already-slowing economy, this has accelerated negative sentiment and reinforced a flight to safer assets.

August employment was down by 4,000 jobs, the first fall in four years.  It’s no surprise where the blame lies; the finger again points at the subprime cave-in.  Lehman Brothers, for instance, was forced to close down its subprime unit, at a loss of 1,200 jobs, while construction lost 22,000 jobs.  This, though, does imply job growth continues elsewhere.

At the August meeting of the Federal Reserve, the federal funds rate was, held (again) at 5.25%.  Maintaining this rate for so long has brought criticism in the light of the recent subprime meltdown.  The Fed responded to the crisis by temporarily lowering its discount rate (the rate at which it lends to commercial banks) from 6.25% to 5.75%, in order to “provide depositories with greater assurance about the cost and availability of funding”.  Some commentators don’t believe this is enough and, ahead of the Fed’s meeting on 18 September, are calling for a drop in rates of up to 50 basis points.

Annualized new home sales continued to head south in July, down 10.2% on July 2006 numbers.  The subprime mortgage dilemma is likely to see these figures fall even further in the next few months.  The slowdown has also extended to the number of months new houses are on the market before sale, which has risen from 3.6 months in July 2006 to 6.1 months in the latest figures.  The Mortgage Bankers Association in its August forecast suggests that the number of home starts will continue to fall until the end of 2008, and that home prices will stay flat until the same time.  This is not good news for those institutions and borrowers literally banking on house prices to recover, thereby hoping to safeguard their investments.

Further signs of a slowdown are evident in preliminary GDP figures for the June quarter.  Year-on-year growth was 2.1%, down significantly on the growth recorded in the December 2006 year (2.9%).  Fed chairman Ben Bernanke estimates that the slowdown in residential construction has shaved 0.75% off the economy’s growth rate.  Growth in the latest quarter relied on higher exports and government spending, along with a decline in imports.  Exports were up 7.8% year-on-year.