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US recession confirmed by latest data

The speculation is over. The latest data by the US government agencies confirm that in the first three months of this year the USA economy has been in recession. Formally, GDP growth for the opening quarter was 0.6% at an annualised rate. But if you strip out the build up of stocks of unsold goods and housing and look at final sales that figure changes to a decline of around 1% (annualised rate). Consumption of both durable and non-durable goods fell markedly.

Moreover, whereas business investment held up fairly well last year through the credit crunch this has now fallen. Private sector employment has fallen for 4 months in a row and total US employment (non-farm) has fallen for the last three months.

So there is no doubt the recession is underway as the effect of credit tightening and the collapse of the US housing market last year has now fed through to a fall in consumption and investment. Only a fairly buoyant export sector on the market of the continued growth of the rest of the world (especially Asia and Latin America) is bolstering USA PLC.

The rest of the year
How long and how deep is the question analysts are now asking. Market and Marxist opinion is polarised between the “worst since the second world war” (see Blackburn ) and the “short and shallow” camps.

In the short term it will get worse n the USA. The unsold stocks that have been built up will force more cuts in production this quarter and the next. In addition and decisively the housing market has not yet stopped its sharp fall and until it does personal and corporate debts and losses will continue to mount, dragging down GDP further.

To date, the rise in unemployment has been less dramatic than at the similar stage in the previous two US recessions (2001 and 1991) – reflecting better corporate profitability and leaner payrolls this time around. But if this worsens noticeably in the rest of the year then this too will deepen the recession.

Something else to factor in is the US government’s attempt to boost growth by handing $160bn back to US households in the form of tax rebates. These cheques arrive in the post this month and next and depending how much is spent and how much saved (or used to pay off debts) this will boost GDP for the rest of this year. And export markets continue to rescue major US companies from disaster, as evidenced by the latest data on US car firms’ sales, which keeps profits and stock prices firm despite collapsing domestic sales.


Past cycles

To be the worst recession since the second world war unemployment would need to surpass the 11% plus it reached in 1983. Since then unemployment has peaked at 7.9% (1992) and 6.3% (2003) in the last two cycles. At present it is 5.1% and rising.

The 1981-83 recession was also the longest (about 18 months – with the last two being roughly nine months each) and the deepest in terms of GDP collapse.

For the current recession to be worse than the 1980s the housing market would have to continue in free fall for some time ahead. Every additional 10% fall in house prices will see household wealth lowered by $2tr and cut about 1% off consumer spending (which accounts for 70%of US GDP). Prices have fallen by about 13% so far from their 2006 peak. With this job losses will escalate, profits fall, cents mount and credit remain tight as banks shoulder losses.

The tax rebates is a bit of sticking plaster in an election year. The real cause of the recession is the bursting of the house asset bubble. The fate of the recession – depth and duration – depends on how soon or late it bottoms out. At current income, employment, interest rate and house price levels the “affordability index” has turned positive again last month, but there is a still a huge oversupply (nine months stock) which is being added to each month by escalating foreclosures. Until this turns around human misery caused by the capitalism’s market anarchy will deepen.

Thu 01, May 2008 @ 16:00

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discussion of this article

Bill J said…

Yes it certainly is a paradoxical situation, with a recession in terms of final sales and personal consumption but actual GDP growth.

Whether that's a recession seems to depend on which definition you pick. Most of the various bourgeois assessments seem to be more upbeat than at the start of the year, when many of them, like Goldman Sachs for example predicted a 1% decline in Q1. Of course this didn't occur, consumption did not fall at the rate they expected, industrial output held up and inventories recovered somewhat from the extremely large fall at the end of last year.

This growth of inventories may pose future problems, but even here things may not be what they first appear as JP Morgan explain;

"Inventory concerns less than they seem While the forecast of 1Q08 growth has been raised to 0.7%, more than all of that growth is accounted for by inventories. Concerns about inventory accumulation were reinforced by the March durables report, which showed that durables stocks at the factory level rose 1.1%m/m in March and at an 8.6% pace over the past three months, while factory shipments were declining.

However, these figures overstate the extent of nascent inventory problems. Source data indicate that real private inventory accumulation throughout the economy was miniscule in 1Q08, only about $5 billion at an annual rate (from a 4Q07 base of $1648 billion, in 2000 dollar terms). Official estimates will be released with the advance GDP report on April 30. The boost to growth in 1Q08 comes because inventories declined in the prior quarter. Expected 1Q inventory growth that is barely positive contrasts sharply with the situation entering many recessions. Prior to the 2001 recession, for example, inventories had been increasing at nearly a 6% pace. Moreover, even the situation in durables manufacturing is less worrisome than the headline figures indicate. Much of the increase in durables inventories is in the civilian aircraft industry and reflects work in progress for an industry with considerable backlogs. These inventories are a signal of increased output ahead, rather than a warning that cutbacks will be required. Inventories for durables-producing manufacturing outside the aircraft industry are growing at a more moderate 4.5% pace." https://mm.jpmorgan.com/servlet/OpenPubServlet?skey=TU1SQy00NDA1NDAtMSw0MjAsRExZX0MxX0ZFRUQA&Name=1302103.pdf  

Either way we've still to see the Great Depression.

Thu 01, May 2008 @ 17:30

Bill J said…

Wachovia make a similar point about the effect of the slow down in domestic demand on imports;

"Businesses are also cutting back. Investment in equipment and software fell at a 0.7 percent pace during the first quarter, while outlays for structures declined at a 6.2 percent pace. Homebuilding clearly remains mired in its slump. Residential construction plummeted at a 26.7 percent pace in the first quarter, marking the largest quarterly drop since 1981.

With all these negatives, it is still miraculous that overall GDP still posted an increase at all. The answer is somewhat surprising. A very large percentage of consumer goods are imported and the sharp cutback in consumer spending has led to a dramatic slowdown in imports. The decline in homebuilding is also cutting into imports. Just think of where all those door knobs, lighting, and plumbing fixtures are made today. So if you are wondering what happened to the recession, the short answer is that it has been outsourced along with the production of many of these goods. A better way of looking at the GDP numbers is real final sales to domestic purchasers, which subtracts out the trade and inventory data. This measure more closely captures what consumers and businesses are feeling today and still makes the case the domestic economy is in recession." http://www.wachovia.com/ws/econ/view/0,,4278,00.pdf

Thu 01, May 2008 @ 18:39

Graham B said…

Really no question that the US is in recession and probably has been since January, and that the NBER will eventually call it as such. 0.6% growth in the latest 2008 Q1 release was a little better than most forecasts, but the mix of figures - build-up of inventories, falling personal consumption in goods, decline in non-residential structures, as well as residential investment still nose-diving - all point to a further fall in GDP growth in Q2, to around zero. The big question is the second half of the year? http://www.globalinsight.com/Perspective/PerspectiveDetail12397.htm  Good summary here, and forecasts Q3 at 2.0 - 2.5% http://online.wsj.com/public/resources/documents/info-flash08.html?project=EFORECAST07  WSJ survey of economists forecasts Q3 at 2.1%. And many see little improvement from this throughout 2009. This would seem to point to a ‘mild recession’ of average length, but a period of sluggish growth for the US economy afterwards. Whatever it is, it is a long way from what much of the Left are predicting at the moment.

Thu 01, May 2008 @ 23:41

Bill J said…

I think the thing that will decide it definitively is what happens next. The March construction figures showed a strong recovery in non-residential construction http://www.census.gov/const/www/c30index.html

When most of the bourgeois commentators were forecasting a big decline. Basically they believe that there is a three year lag behind residential construction, when in fact I reckon non-residential generally picks up when residential slumps as the cost of construction falls. Interestingly manufacturing is one of the strongest growth construction sectors, presumably on the back of the export boom. Similarly pay rolls haven't shrunk at the pace they anticipated either. http://www.bloomberg.com/apps/news?pid=20601087&sid=aabt.Q79iKsE&refer=home

What is more important perhaps is what it means for the USA in the longer term. How about? The end of consumer capitalism? The myth that Joe Soap could join the consumption glut on the basis of never-never borrowing is over, finished. The polarisation of the class divide. A marked reduction in working class living standards. And a decline in the power of US financial hegemony world wide? Just a thought.

Fri 02, May 2008 @ 17:47

Bill J said…

Further info confirming the likely up rating of US GDP estimates for Q1, due to the greatly improved balance of payments, we have referred to in the past; http://www.wachovia.com/ws/econ/view/0,,4295,00.pdf This when combined with the better than expected non-residential construction figures, could lead to quite a substantial rise.

Fri 09, May 2008 @ 20:47

Arthur Bough said…

If you look at the reality we have had a Credit Crunch for about a year, a financial as opposed to an economic crisis that is probably the worst since WWII, and we have oil at over $140 a barrel. The fact that we are only guessing whether the US is in a recession - and no one is suggesting other major economies are, though Japan might not be too far off - I think tells us something about just how strong the udnerlying world economic situation is!

I'm not sure that the cause of the US slowdwon is the housing market crash. In fact rarely is the housing market the assassin of the economy. Nearly always it is the other way round. The real cause of the UK housing Crash in the early 90's was the rise in unemployment. Really, provided people continue to have paid employment with at least constant wages falling house prices can have no real economic consequecne. People can still pay their mortgage if they have one. Negative equity is only of significance IF you have to sell your house. Of course, in conditions where people use rising house prices as an ATM i order to borrow more in order to spend that will have economic consequences, but I don't think we should overrate it. The majority of consumer spending continues to come from income not from such borrowing. Moreoever, as I have pointed out elsewhere a reduction of that borrowing and the subsequenct debt servicing cost CAN actually be a basis for stronger consumer spending as more is available to spend rather than to cover interest payments.

I think the real cause of the US slowdown is in fact the series of Rate increases put in place by the FED a couple of years ago, which have had their intended consequence of reigning in the excess liquidity put into circulation during the downturn. The fact the Fed believes it can do that - and the ECB is about to raise rates too - plus the fact of the rapidly rising inflation around the world is again a sign of the underlying strength of the world economy.

Therewas some discussion on the BBC last week of news coverage of the economy, and comment that the coverage is overly pessimistic. I agree, and to be honest I wonder how much is motivated by concern at the sight of rising wages throughout Europe, the succesfult tanker drivers strike, and the threats of possibe action by Public Sector workers, and an attempt to sow a mood of pessimism amongst workers aimed at dampening wage expectations. The facts certainly do not confirm the message of the doommongers.

Wed 02, July 2008 @ 17:00

UK Software company said…

Cool,

Keep up the good work,

Anyway, thanks for the post

Wed 02, December 2009 @ 14:17

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