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Slump in services sector signals arrival of US recession

Shockingly weak services data could be final proof of economy shrinking

ANY hope that the United States economy might escape a recession has now all but disappeared, say analysts.

The last straw came when the country’s huge services sector – covering industries such as banking, retail and construction – shrank last month for the first time in five years.

The shockingly weak data released on Tuesday is just about the final proof that the world’s biggest economy started contracting last month, said economists in the US.

Indeed, the surprise slump in the Institute of Supply Management’s (ISM’s) index of non-factory activity led one top analyst to say the looming slowdown may be worse than 2001’s dot.com bust.

For Singapore, economists in the Republic said momentum in Asia will help keep the local economy in positive territory, though some added that a slew of bad US news may prompt the Government to trim its growth forecast for the year.

‘Not only is the economy in a downturn, the abruptness and depth of the decline seen in this report…adds to our concern we are facing a much deeper downturn than we saw in 2001,’ Merrill Lynch economist David Rosenberg wrote in a note to clients.

Mr Rosenberg cited other signals – the collapse in car sales and unprecedented credit tightening conditions – for his bearish prognosis.

The January ISM reading for services fell from 54.4 to 41.9, under the 50-point threshold, indicating a contraction. This was far below market expectations of 53 and was the lowest reading since October 2001.

The dismal data followed another bleak statistic last Friday when the US government reported the economy lost 17,000 jobs last month, the first dip since 2003.

‘This is an indication for the first time that the bulk of the economy is contracting,’ MFR economist Joshua Shapiro told the New York Times. ‘It is sending people into recession panic mode.’

Wells Fargo economist Scott Anderson said: ‘The number’s so terrible it’s almost beyond belief, especially among the optimists.

‘I think the writing’s on the wall. More and more economists are talking about recession and whether it’ll be a severe or mild one.’

A recession is typically defined as two straight quarters of economic shrinkage in quarter-on-quarter terms.

With all indications that a recession is all but certain, economists said the Federal Reserve may spring another surprise cut on benchmark interest rates, possibly by half a percentage point.

‘This keeps the Fed in aggressive rate-cutting mode with a strong chance of an inter-meeting move possible before the March 18 meeting,’ said Merrill economists.

Disappointing data from Europe on Tuesday also signalled that the US slowdown is spreading out, increasing pressure for the European Central Bank to follow the Fed and cut rates, reported Bloomberg News.

Economists in Singapore said with the US slowdown seemingly more severe, US consumers may start to feel the pinch soon and reduce purchases of goods made in the Republic.

OCBC Bank economist Selena Ling said US consumers are being hit by falling home values, rising difficulty in getting credit, a weaker jobs market and tanking bourses.

But CIMB-GK’s Mr Song Seng Wun said it is still too early to be sure how US consumers will adjust spending patterns. ‘It’s still a close call. I wouldn’t get too concerned.’

Action Economics’ Mr David Cohen said momentum from Asia’s fast-growing economies will provide a buffer.

Also, expected monetary easing from the Fed should provide some support.

‘It’s still likely Singapore will show continued growth. Maybe we’ll be at the lower end of the Government’s range, but still positive growth in 2008,’ he said.

Still, Ms Ling reckons that the fast-deteriorating outlook for the US in the past month may prompt the Government to review its forecast of 4.5 to 6.5 per cent growth this year.

‘They may bring it down to 4 to 6 per cent, or at least give an indication that it’ll be at the bottom of their current range.’

 

Source: The Straits Times 7 Feb 08

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