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NEWS ANALYSIS: US slowdown likely to be worse than recent ones

WASHINGTON – THE chances of the United States avoiding a recession appear to be growing dimmer by the day, and any contraction in the economy will likely last longer and be more severe than other downturns in the past 20 years.

Recent reports have shown the US housing market slump and rising defaults in the mortgage market are now taking their toll on job growth and on the manufacturing and services sectors, reported Reuters.

Heavy consumer debt, a growing federal budget gap and rising prices, however, could make any recession worse than Americans have experienced over the past two decades.

‘If we do go into a recession, it’s going to be more severe and long-lasting than the last one,’ said Harvard Professor Jeffrey Frankel, a member of the private sector panel that dates US recessions.

The nation’s last two recessions – in 1990-1991 and 2001 – each lasted for just eight months.

But the two downturns that ended in 1975 and 1982, when economic conditions bore some similarities to today, each lasted 16 months, making them the longest recessions since the Great Depression of the 1930s, according to the National Bureau of Economic Research (NBER), the accepted arbiter of US recessions.

The US economy entered the recessions of 1975 and 1982 saddled with huge government budget deficits from spending on social programmes and the Vietnam war, and was suffering double-digit consumer price inflation.

Prof Frankel said members of NBER’s business-cycle dating panel had been in contact with each other over the prospect of a recession through e-mails, but it would likely take months, or perhaps even more than a year, for the panel to determine whether the economy had turned down.

Even though the latest data showed a loss of jobs last month and the largest monthly decline on record in an index of service-sector activity, Prof Frankel thinks a recession is not yet at hand. ‘My description is that we are teetering on the edge,’ he said.

Some economists warn against counting on government spending and lower interest rates, the tools commonly used to battle recession, because the fiscal deficit is already large and consumer price inflation rose to its highest level in 17 years last year.

‘So far, the Federal Reserve has been having a lot of luck,’ said Mr Eugenio Aleman, a senior economist at Wells Fargo in Minneapolis, but he thinks inflation will tie the Fed’s hands.

‘But the Federal Reserve will be pushed to increase interest rates, and then we are going to go into a true recession, a longer recession than what we are expecting today,’ he said.

The main factor keeping overall inflation high has been soaring energy prices, the largest single driver of inflation over the past year. Crude oil prices reached a record US$100 a barrel last month.

‘I would be happier to see if we got a real break on oil prices. That’s not happening, and that’s a little bit disconcerting,’ said Mr Bernard Baumohl, the managing director at The Economic Outlook Group in Princeton Junction, New Jersey.

While the central bank has said it expects inflation to moderate, there are signs lofty energy prices have begun to filter through to prices more widely.

The government said last week that the Fed’s favourite inflation gauge – the core price index for personal spending, excluding food and energy – rose 2.2 per cent last year, above the 2 per cent ceiling seen as the top of the ‘comfort zone’ for the index.

At the same time, the government’s budget is moving further from balance. On Monday, President George W.

Bush released a budget plan that would see the US deficit widen to US$410 billion (S$579.9 billion) for the current fiscal year and US$407 billion for fiscal 2009, not far from the record hit in fiscal 2004.

The last time the US economy moved into a recession, in 2001, there was a budget surplus, providing an opportunity for extra government spending to boost economic growth.

In addition, consumers were not as heavily in debt and credit was more freely available.

Consumer spending represents roughly two-thirds of total US economic output, and consumer spending grew at the slowest pace last year since 2003.

‘My biggest concern right now is the consumer. The consumer is highly levered and when the economy faces a credit crunch on in a highly-levered scenario, then you have trouble,’ warned Wells Fargo’s Mr Aleman.

The job market could take the biggest hit. According to the Centre for Economic and Policy Research, up to 5.8 million additional workers in the US could join the ranks of the unemployed by 2011, if the economy were to fall into a severe recession.

The report, according to the Seattle Times, comes on the heels of the government’s news on Friday that US employers are already cutting back on hiring. Last month marks the first monthly contraction in non-farm payrolls in four years – data that may be the smoking gun showing that the economy has entered a recession.


Source: The Straits Times 6 Feb 08


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