Misreading economy not unusual due to mixed signals from various sectoral data
WASHINGTON – FOR all the complex ways in gathering economic data and crunching it at the speed of light, predicting recessions is still an inexact science.
‘It’s the economy, stupid,’ said Mr Bill Clinton and he was elected President in 1992 on promises of ending a recession that had, in fact, ended 18 months earlier. Only later analyses showed that.
Misreading the economy’s body language is not unique to politicians. The National Bureau of Economic Research in the United States had declared that the previous recession began in November 2001. Not really.
It actually ended then, having begun almost a year earlier.
It is an economist’s occupational hazard that Federal Reserve chief Ben Bernanke is certainly aware of as he stands behind – though is unlikely to explicitly endorse – the Bush Administration’s proposal of reviving a sagging economy through measures that include tax cuts.
In his own snapshot of the economy, the so-called beige book containing anecdotal reports of business conditions around the country, Mr Bernanke refuted claims that the US had already entered recession.
The report this week said economic activity ‘increased modestly’ from mid-November to the end of last month.
It noted robust demand in health care, hotels, insurance and the legal sector, while agriculture was upbeat and manufacturing mixed.
The biggest concern is the increasingly frugal US consumer. Hit by the housing slump, credit squeeze and rising petrol prices, he is crimping his spending, and this may trigger a recession.
Analysts were shocked by retail sales figures this week. They dipped 0.4 per cent last month – the sharpest fall for six months.
And sales for last year rose 4.2 per cent, the lowest annual increase since 2002.
The consumer’s unwillingness to spend is partly because he sees his net worth declining as housing prices have tumbled.
Insecurity prevails on the jobs front. Unemployment jumped to 5 per cent last month, the highest in two years. It was that high during the last recession in 2001.
Even then, the signals are mixed, as one US paper noted: ‘Construction workers are on unemployment lines, but engineering and consulting firms are in bidding wars for staff members.’
Inflation also dealt a blow. Recent figures show consumer price inflation hit 4.1 per cent last year, the highest since 1990.
The recession alert has been sounded by many prominent economists and big-name investment houses.
Others tip ‘rolling recessions’ – as seen in the 1980s – where certain sectors or some states enter recession at different times but the economy, as a whole, is spared.
KEY indicators point to a downturn for the US economy:
Retail sales grew last year at the slowest pace since 2002.
Unemployment shot up to 5 per cent last month, a level last seen in the 2001 recession.
Full-year inflation is at a 17-year high.
Corporate profits are expected to decline this year by an average 7.5 per cent after tax, according to a Goldman Sachs estimate.
Source: The Straits Times 18 Jan 08