After last Friday's announcement of the third consecutive drop in US
employment figures, following hot on the heels of Ben Bernanke's admission
that the American economy is already in recession - or more precisely that
“a recession is possible ... there's a chance that for the first half as a
whole, there might be a slight contraction” - I am probably the only
economist left in the world who still believes that a US recession is likely
to be avoided.
Obviously, I drew some encouragement for this view from the surprisingly
decent ISM index, which triggered the huge rally in global stock markets on
Tuesday (with some help from UBS and Lehman and the news of further
regulatory moves to ease the credit crunch).
But the monthly employment figures are widely regarded as the real litmus test
for the recession/soft landing debate.
So does Friday's 80,000 employment decline mean that the US is in recession?
And does it matter anyway whether the technical definition of a recession is
or is not satisfied? The answer to the first question is No and the answer
to the second is Yes.
A drop of 80,000 in payroll employment is still not enough to signal a
recession. If the US had already been in recession since the start of this
year, as most economists believe, monthly payrolls would by now be falling
by well over 100,000 a month, rather more than the average of 77,000
recorded in the past three months.
More important, other short-term indicators, such as the purchasing managers'
indices, the industrial production figures and the quarterly consumption
statistics (up a very decent 2.8 per cent in the fourth quarter), would be
confirming the signs of a generalised downturn.
Instead, all these figures are still consistent with a mid-cycle slowdown
similar to the ones that the American economy experienced in 1995-96 and
1986-87.
But does the distinction between a recession and a mid-cycle slowdown really
matter anyway, given that the US is obviously suffering from one of the
worst housing and financial crises in living memory - a fact that nobody
(including me) can any longer deny? Actually, this distinction does matter
quite a lot.
The difference between a recession and a slowdown is not just a matter of
semantics, because there is a world of difference between a dislocation
confined to one or two parts of the economy - say, housing and mortgage
lending - and a generalised economic decline in which the weakness of demand
in a few sectors creates a self-sustaining downward spiral of falling
employment and incomes, weakening consumption and investment and further
declines in activity across the economy as a whole.
It is the self-reinforcing and contagious nature of recessions that makes them
different - and much more dangerous - than the sector-specific slowdowns
that occur in market economies all the time.
This is why the National Bureau of Economic Research defines recessions in a
very specific way: “A recession is a significant decline in activity spread
across the economy, lasting more than a few months, visible in industrial
production, employment, real income and wholesale-retail trade.
A recession influences the economy broadly and is not confined to one sector.
Expansion is the normal state of the economy; most recessions are brief and
they have been rare in recent decades.”
This definition of recession is not just a matter of semantics. The
broad-based and lasting nature of the economic decline is absolutely
essential because a sector-specific or transitory slowdown is not sufficient
to counteract the natural expansionary momentum of a capitalist economy.
This, incidentally, is why comments frequently seen in the media about a
“housing recession” or “manufacturing recession” or “retail recession” or
“export recession” are always technically inaccurate.
Problems affecting only one or two parts of the economy are a continuous
feature of any market economy with its constant variations in demand and
supply for particular products and services.
Such fluctuations can be very painful and disruptive for the sectors involved,
but at the macroeconomic level they rarely do much serious harm.
But surely the financial and housing crises in America are now so severe that
there can be no hope of avoiding the sort of self-sustaining downward spiral
described above?
Apart from the lack of statistical evidence (so far) of a recession already
mentioned, there are three other reasons for continuing to resist the
consensus view.
First, the occurrence of a severe financial crisis is not, in itself, a
sufficient reason for expecting a recession.
In fact, there have been severe financial crises that did not lead to
recessions in the middle of every previous economic cycle: for example, the
Latin American defaults of 1984, the stock market crash of 1987 and the
savings and loan and housing collapse of 1988-89 and the Mexican peso, Asian
and Russian crises of 1995-98.
A second reason why an American recession will probably be avoided - or, if it
does occur, will be extremely brief - is that powerful expansionary forces
are about to come into play in the US economy in the months ahead.
From the second week of May onwards, every American household will receive tax
rebate cheques of between $600 (£300) and $2,000. As a result, personal
disposable income will grow at an annualised rate of well over 10 per cent
in the third quarter of this year.
Even if only half this money is spent, US consumption will therefore be
guaranteed to grow by at least 3 per cent in the third and fourth quarters.
And beyond that, the lagged effects of the Fed's recent monetary easing will
kick in from the start of 2009.
This is why Mr Bernanke could afford to state so confidently on Wednesday that
the US economy would return to trend or above-trend growth by early 2009.
Thirdly, there is the US housing market.
Financial markets imply a further decline of about 20 per cent in US house
prices, but financial markets are sometimes wrong (as must surely be obvious
by now).
US house prices have already fallen almost 15 per cent from their peak and as
a result property in America is no longer expensive in relation to average
incomes.
In fact, the ratio of average house prices to personal disposable incomes is
now 5 per cent below its 40-year average and only 9 per cent above the
record low it reached in 1990 and again in 1995.
Given that disposable incomes are rising at about 6 per cent annually, the
housing valuations would fall to a new all-time low within 18 months or so,
even if there were no further decline in house prices from now on.
And the last time American homes were as cheap as they are today in relation
to disposable incomes, interest rates were much higher.
For example, in 1990 and 1995, when house price to income ratios were last at
about present levels, standard 30-year US mortgage rates were 10 per cent
and 8.5 per cent respectively.
Today, the corresponding rate is 6 per cent. As a result, affordability
indices that take both interest rates and incomes into account show US
property to be very good value already.
For example, the National Association of Realtors' composite affordability
index stands at 135, compared with a record high of 140.8 reached in 1999,
at the start of the recent housing boom.
After a few more months of falling house prices or rising disposable incomes,
American housing will start to look irresistibly cheap.
In sum, if America can get through the next month or two without sinking into
a serious recession, the danger should be past by the second half of this
year.
anatole.kaletsky@thetimes.co.uk
Kaletsky this is mindless nonsense, the US has been in recession for two years. The worst is yet come and will make 1929 look like practice !
Roger, Epping,
Disposable income up? We'll see how much the gas prices effect that...
Ben, Williamsport,
You know what I'm doing with my "stimulus" check? Paying the mortgage. It won't add one penny to my discretionary income, and it won't help the U.S. dollar or the U.S. Treasury. The government tried this a few years ago (the last presidential election year?), and it didn't work then ...
Hart, Durham, US
Whistling in the dark. The US economy faces further ARM resets this summer, and those resets will aggravate the mortgage crisis. Further, there is unrelenting demand pressure on oil and commodities worldwide. No significant metric is moving in any direction but economic collapse.
Michael, Palo Alto, CA, USA
And housing looks "irresistibly cheap"? Ha! I'm looking for my 1st house now. Guess what? All the starter homes were bought up, knocked down and turned to luxury condos at twice the price for the same or less sq ft. What am I supposed to buy? Other than 3 bdrms or overpriced condos theres nothing!
J, Boston, US
"... every American household will receive tax rebate cheques of between $600 (£300) and $2,000..."
Not true -- only those earning under ~$150k.
"...Even if only half this money is spent, US consumption will therefore be guaranteed to grow by at least 3%..."
I'd argue most people are paying
Markus, Boston, USA
Now is not the time to buy real estate in the U.S. It will take another 12 to 18 months for real estate prices to bottom out. Most of the subprime lenders are sitting on more foreclosures than they're letting on, because they're occurring faster than they can be processed. And bankruptcies are up.
Mitchell Smith, Irvine, CA, USA
This is my reality today in America. Cripplingly high (and spiraling) oil/gas prices. Soaring food costs. Weekly notice of another friend who has lost their home to foreclosure, and are now facing homelessness. Flat wage growth. And let's not forget ever-increasing tax burdens. Yeah. Happy Days!
D, Bangor, USA
This analysis is utter rubbish.. Wages are down, debt is up, inflation is rising, espenses are rising--the US consumer doesn't have the money to generate any real economic growth.until a long term national economic strategy is put in to place. The statistics here are carefully manipulated. Idiot,
S Waugh , Jersey City, USA
The US may well avoid a technical recession. It will come at the expense of impoverishing themselves with the combined destruction of their currency by devaluation and inflation. And that is not a real economy success.
harry e, London,
The World Economy will collapse.Unemployment and inflation soar.Depression stalk the land.But a saviour will emerge.But this time,with global warming Stalingrad won't be so frosty.
James Finnegan, London, UK
Inflation in the UK is out of control so what do the BOE do?Cut rates,economic madness in the extreme.
stephen hulton, eure, france
Contrary to what some in this forum might think there are economists in the US that think a recession will be avoided. Brian Westbury is one of them. Nevertheless Anatole's piece is overly optimistic and a little inconsistent. I don't see how a severe financial crises which some say is as bad as in the Great Depression can be that easily brushed under the rug. I'd rather guess that the Greenspan plunder will have to be purged out of the system, but continued monumental reinflation might help avoiding the worst for now. To the issue of job growth I would recommend to everyone to look up the Big Picture blog from Barry Ritholtz. 80 percent of the actual NFP number are now coming from the Birth/Death adjustment, which is a model and not based on actual sampling data. In 2000 only 30 percent of the data came from the B/D adjustments, therefore comparing the job numbers with other slow downs is comparing apples to oranges. What is worse it is a time series model and therefore per definition not suited to detect turning points in the economy.
Alfred, Jersey City, USA
The unemployment rate is still low here in America. We have monetary and fiscal stimulus in the pipeline, and more available if needed. Exports have been growing, and I believe our current account deficit is declining. The dollar will start strengthening, though not right away. Sorry to say, but we are in better shape than the rest of the world, This is America, after all. :)
George, Moonachie, NJ USA
One of the few economists who looks at the long term view.Recessions and booms come and go. Unfortunately recessions cause a lot of damage and bring us back to the reality that money doesn't grow on trees.The actions of central banks take time to take effect. They don't want a recession either and i believe that the Fed's actions have been commendable to say the least . Compared to the BOE which happily sat and watched Norther Rock collapse and then wondered why the financial community lost confidence in the country the Fed's actions are hihly proactive. I wish the UK had a Bernanke heading the team.
Samit Hathi, Northwood, UK
Another factor that supports your view is venture capital, the vultures up on Sand Hill Road here in Silicon Valley do not hand over their money the way they are now unless they have confidence in getting a good return.
John W Meadows, Los Altos Hills, California
Anatole, if you consider that the populus is increasingly in agreement with the fact that 'true' inflation is grossly understated, and you agree, then you will have to concede that the GDP deflator is grossly understated.
This is probably of the order of a 'few' percentage points, hence 'your' and western governments' "real" GDP growth figures are a nonsense.
Western economies have been teetering on the brink, or actually in, recession for quite some time. The fudging of inflation measures has created the illusion of growth.
I made this point in correspondence some time ago, with little repsonse. In April 2008 the low inflation hoax is much more difficult to pull off.
Your phrases "powerful expansionary forces" and "expansion is the normal state of the economy" should subsittute the words 'inflationary' and 'inflation' in the appropriate places.
Lies, damn lies and statistics.
At this stage the average consumer is calling it better than the heretic economist.
Derek, Cape Town, South Africa
Nobody should underestimate the power of the undervalued USDollar in promoting exports in the first Quarter of 2008 and the rate of inflation increases is falling.
Sure the US economy has major flaws (budget deficits etc), but then so do many other economies. The UK consumer is 100% tapped out (over borrowed) and Real Estate in the UK is one huge bubble. Then inflation is very high.
China has massive inflation and is an ecological and health disaster, which has already happened.
Throwing stones at each other (by detrimental posting). won't make everyones home economy any better. The world is currently economically very unstable.
Ian, Madison, USA
Hey Anatole, how come you never appear on any American financial shows? Your perspective would really help to counter-balance all those doom-and-gloom analysts.
JJ, Columbus, Ohio
Anatole you sure brought out the America bashers on this one. The uniform level of vitriol argues well for your case.
Bruce Lawrence, chicago, illinois
Hey Anatole..I'd love to see you on Kudlow and Company on CNBC. We need to hear this from you (before we talk outselves into the downward spiral). Seeing you on there would be great!!!
Iain, New York, USA
Judging from the response of our American cousins on this blog Anotole is out of his depth. Even his views on the UK situation will be in question in future.
john, milton keynes,
America's problem is living on other peoples' money. The World knows this. How are they going to pay the $600 cheques? By borrowing or printing it of course and the World knows this. The U.S. government figures you place so much reliance on have been so distorted by political need over the years that they have become meaningless, the World knows this. From the comments already posted the World also knows that your articles are just an addition to the propaganda stream from the establishment.
Scott, Bangkok, Thailand
So the capitalist system is about ever lasting expansion? I suggest you try just breathing in from now on and see what happens. Might I also mention the growing scarcity of all natural resources from oil to wheat and rice and the ensuing price inflation for commodities. Lower interest rates won't help much there especially when your currency nosedives and you have to import most of them. Capitalism is all about competition and somebody will always lose out. What do you think people will do with the tax rebate when they run the risk of losing their home? Go and buy more t-shirts made in China?
S Jaeger, London, UK
i do not know, hope you are right,. american's recession is not only a disaster for themself, but will bring down the whole world's economy....
cty, zhejiang, china
Anatole, you are the only economist who still believes the US - and UK for that matter - is not in recession. Any small percentage growth in GDP is negative in global terms when the depreciation of the dollar and sterling are factored in.
Real people are feeling the pain now in the US and the UK. Printing money, playing pass the parcel with debt, or tweaking interest rate levers is not going to work. There is a huge debt hangover and it has to be paid for with real wealth creation and contraction of consumption.
Stephen Marchant, Broadhempston, UK
I don't know where this "disposable icome" rise of 6% comes from. Real wages with respect to inflation have been decreasing in the US. Based on this, the supposed increase in disposable income must be among those not earning wages, but deriving income from investments. How many homes and autos can these folks consume? When the wide base of wage earners are squeezed, as they now are between gasoline prices, incipient inflation derived form energy / transport prices and negative job growth, the forecast for consumer spending is weak at best. Remember, in the US nearly all wage earners are dependent on automobiles for transport to work and the marketplace. Three hundred dollars represents less than 10 tanks of gas at present and will represent less when most checks are received. This additional income won't result in widespread spending on consumer goods. It will be used to catch up, but not get ahead of, essential expenses like fuel, past due credit card accounts, mortgages.
Gary, niantic,
you are a complete idiot if you think the US will avoid a recession its been in recession for two years with nearly 10% of their population collecting food stamps. An open southern border allowing Mexicans to pour in regardless of the the Patriot Acts and a major part of the manufacturing base having moved to the far east are not helping. The only point in question is whether the US goes into full blown depression.
Roger , Epping,
Well, that’s your cock well and truly on the block Anatole.
How cheap is US housing based on earnings? Not quite so cheap now? Affordability ratios change quickly, those introductory rates are being replaced, mortgages are becoming more expensive, remember that’s where the whole problem of easy credit became apparent….
Can real average disposable earnings grow at 6% if inflation is a growing concern and the job market is weakening? A little optimistic maybe or are your figures gross of inflation?
How does a small 3rd quarter spike in spending save the economy, your ‘10%’ increase is a 2.5% increase on the year and if that is set against 2 quarter declines then you have at best got nowhere.
Chris, Dubai,
I love the way Anatole gets under the skin of all these doom mongers who don't have any perspective. Or maybe it's because they missed out on or didn't take advantage of the previous boom years properly, that they 'want' the economy to collapse. Like red left wingers, green with envy.
Now or very soon is the time to get back in and start buying!! Property in the US at these exchange rates!!? This is a fantastic opportunity.
Paul, London, UK
The choice to use the 40-year average of house prices to disposible incomes ration is illuminating as this is based on the complete presumption that this is a meaningful period to measure.
I would like to see some justification for use of a 40-year average - even if it is to promote the assumption (virtually refuted earlier in the article) that this period is long enough to balance out any fluctuations, despite the consideration that by the writer's definition of recession a full period can be calculated and the current relative position in the cycle measured with a far greater degrere of accuracy.
40 years takes us back to 1968, which by all accounts was not the new dawn of economic prosperity. For that we can go back another 20-25 years - which completely mucks up Mr Kaletsky's calculations.
thomas, london,
hey dreamer,who are you trying to kid? the last time they gave households $600 everybody kept the money and saved it.
On sundays you can pop onto realaitors bus and spend a day checking out all the foreclosures,what was $700,000 is now $400,00!!! oil prices are up so food,bars and even taxis are all more expensive,oh and did i mention we are in a war we can't win.i could go on,but i think we all get the message.we are all living the American dream!!
philip reed, chicago, il,
Recession is a noun that isn't reserved exclusively for economics Anatole. I think when you state the definitition of a recession is.... you mean to state the definition of an Economic recession is.... so technically there is such a thing as a manufacturing recession if the commentator is suggesting that manufacturing is figuratively receding.
Your hair could be in recession for example. Or is the dictionary wrong and it now a word that can only be used as the National Bureau of Economic Research defines?
Dale, Australia,
You have been wrong so many times. Ha!
John Gibson, New York, USA
You erroneously state "every American household will receive tax rebate cheques of between $600 (£300) and $2,000. " There is no rebate for tax payers with adjustable income about $174,000.
John, George Town, Cayman
You forget inflation, currently running at 20 year records on some measures. This could eat into spending power and consumer confidence. Every time the market sees signs of life in the US economy the oil price bounces. Could this effect ensure that strong growth won't return for some time?
Ted, London , UK
You argue powerfully but unreliably. America's economy is fragile, vulnerable to another major shock or a close-spaced series of quite minor incidents; and the Fed has fired almost all the shots in its locker. The danger is indeed imminent rather than persistent, but it is serious, more so than you hint.
Noel Falconer MEcon, Couiza, France
Well, I know one person who deserves to lose his job...
M, London, UK