ECONOMY: New U.S. Data Point to Recession

By IPS Correspondents Reprint | | Print |

Abid Aslam

WASHINGTON, Mar 3 2008 (IPS) - New government data and business surveys show the world’s biggest economy falling into – and possibly already in – recession.

Investors fearful of a U.S. slump have driven down European and Asian stocks even as financial institutions there have admitted to large losses from bad bets on U.S. mortgages. The International Monetary Fund and others have warned that no region will prove immune to the spreading pain.

U.S. construction spending in January suffered its steepest fall in 14 years, the Commerce Department said on Monday. A decline in residential building has spread to hotels, highways, and infrastructure projects paid for by state and municipal governments.

Separately, a benchmark survey showed U.S. factory output in February shrank for the second time in three months. The Institute for Supply Management (ISM), which released the manufacturing data on Monday, caused a stir last month when it found that activity in the services sector, which has long eclipsed manufacturing as an employer, had fallen for the first time in nearly five years.

The ISM said its survey of manufacturing activity fell to 48.3 percent from 50.7 percent in January and 48.4 percent in December. Anything below 50 percent reflects declining activity. The non-manufacturing figure had fallen to 44.6 percent in January, the first contraction since March 2003.

Economic data no longer are needed to tell us a recession has arrived, said Warren Buffet, the iconic businessman and investment oracle.

Common folk might agree. Separate surveys released last week – one by Reuters and the University of Michigan, the other by the Conference Board business research organisation – found consumer sentiment at historic lows.

“The consumer confidence index continues losing ground and, with the exception of the Iraqi War in 2003, is now at its lowest level in nearly 15 years,” said Lynn Franco, director of consumer research at the Conference Board.

“With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase,” Franco added.

Consumer spending also has stalled. It rose more than expected in January, the Commerce Department said last week, but inflation ate up the gain and any benefit it might have had for the economy.

When adjusted for rising costs, especially of food and fuel, consumer spending – which generates two-thirds of U.S. economic activity – stayed flat for the second consecutive month.

The latest findings come on top of earlier reports showing that employers have cut back on new hiring.

The economy barely expanded in the final three months of last year. At 0.6 percent, economic growth fell behind the 0.9 percent rate of population increase. Many economists have said they expect worse – and possibly negative – results for the first quarter of 2008. By one rule of thumb, the country is said to be in a recession if economic activity shrinks for six consecutive months.

To prop up the sagging economy, the Federal Reserve has repeatedly cut a key interest rate since last September. In January, the central bank slashed rates by 1.25 percentage points in just eight days. Its chairman, Ben Bernanke, has signaled a further reduction later this month.

Additionally, Congress and the George W. Bush administration have launched a 168-billion-dollar bid to stimulate consumer and business spending.

Economists have warned that stagflation – a stagnant economy beset by high inflation – is imminent. Bernanke, however, has said he expects prices to reach a plateau.

Business economists, meanwhile, worry about mortgage defaults and heavy debt, which they described on Monday as the greatest risks to the economy. Inflation ranks a distant third among members of the National Association for Business Economics (NABE).

“NABE members are increasingly concerned over the short-term risks associated with subprime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation,” said Ellen Hughes-Cromwick, the association’s president.

By convention, the National Bureau of Economic Research (NBER) designates periods of recession. Economists generally defer to the private organisation although it tends to lag behind others in declaring ongoing recessions.

The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” GDP refers to gross domestic product, a common measure of economic output.