Why does anyone still think that the US economy is in recession? A week ago,
this belief acquired a host of new adherents when Jean-Claude Trichet, the
European Central Bank President, more or less promised to raise eurozone
interest rates on July 3, while US statisticians reported a jump in the
unemployment rate from 5 to 5.5 per cent. Financial markets duly bid up the
euro and dumped the dollar. This currency move triggered the biggest one-day
leap in oil prices on record. This price surge, in turn, confirmed that
recent movements in the oil price, which have had a 97percent daily
correlation with the dollar-euro exchange rate, have been driven almost
entirely by financial players and have had very little to do with energy
supply and demand.
But is America really in recession? Experts seem to think so, including Alan
Greenspan, Warren Buffet, George Soros and Martin Feldstein, the chairman of
the National Bureau of Economic Research (NBER), the academic committee in
Boston that determines business cycle dates. But where is the evidence for
this belief?
To be sure, housing and finance, two important parts of the economy, are in
serious trouble. Yet housing now accounts for only 3.5 per cent of GDP, down
from a peak of 6.5 per cent two years ago, so most of the pain has already
been felt there (in contrast to the situation in Britain and Europe). The
financial sector is bigger, employing 5.9 per cent of American workers, but
only a small proportion of these are employed in cyclically sensitive jobs
related to mortgages or wholesale finance. These two sectors between them
employ far fewer people than the manufacturing and tradeable service
industries that are benefiting from the cheap dollar. And thus far the
troubles in US banking and construction have been almost exactly offset by
gains in America's booming international trade.
There is a world of difference between a dislocation confined to only one or
two parts of the economy, such as housing and finance, and a generalised
economic decline. Remember the official definition of recession devised by
the NBER: “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.”
The difference between a general recession and a sectoral slowdown is not just
a semantic quibble. For businesses and workers, a slowdown is a period of
weak growth, modest job losses and disappointing profits; a recession is
marked by mass unemployment and widespread bankruptcies. For the financial
markets, the two have totally opposite implications. In a recession, share
prices collapse and the only safe assets are government bonds; in a
slowdown, there are big shifts in relative performance between stock market
sectors, but equities generally do well (as they did in the late 1990s and
late 1980s) while safety-first bond investors suffer enormous losses, as
they did in 1994-95 and 1986-87.
What, then, is the evidence of America moving into recession? Looking at the
statistics used by the NBER, there is little or none - at least so far. GDP
has continued to grow, albeit slowly, in the past two quarters and almost
certainly will accelerate in the current quarter because of booming exports;
industrial production has been positive, as have real income and
whole-retail trade. Employment has fallen slightly, but by nowhere near as
much as in the mildest of past recessions. Reliable high-frequency
indicators, such as the monthly purchasing managers' surveys, point to
continuation of modest growth.
Most importantly, consumer spending has remained robust.
American consumers, far from cutting back to bare essentials as was expected
by bearish commentators after the credit crunch, are actually increasing
their spending. The evidence of this, contained in the strong retail sales
figures for May published last Thursday, was by far the most important
economic news of the past few weeks. Yet these figures received almost no
media coverage and little market attention.
Yet May's retail sales figures revealed a picture completely at odds with
conventional wisdom about the US economy. Despite the jump in energy prices
and the related collapse in measures of consumer confidence, retail sales
rose by 1.1 per cent on the month, the strongest gain since last November.
Sales adjusted for inflation and excluding food and energy also showed gains
much stronger than expected. Also April's sales, initially thought to have
fallen, were revised upwards to show a significant gain - and the two-month
average of these volatile figures suggested that growth in the US consumer
economy is now similar to the rate a year ago, before the sub-prime crisis
and credit crunch.
This conclusion is not based on one set of good retail sales statistics, but
includes stronger-than-expected recent figures on industry sales, stocks,
imports, exports, purchasing managers' surveys and even home sales. But in
saying this, am I not forgetting about the dreadful employment figures
published last Friday, which triggered the collapse of the dollar I
mentioned at the start? Not at all. Despite the shock-horror headlines about
a terrifying leap in unemployment from 5 to 5.5 per cent, employment figures
for May were quite strong and fully consistent with the message of economic
acceleration. Rates of unemployment are irrelevant in timing the economic
cycle, since they are a lagging indicator, turning some six to nine months
after the economy as a whole. Meanwhile, the job creation figures, which do
reflect current economic conditions, showed a modest decline of 49,000 in
payroll employment, exactly in line with expectations and consistent with
the economy growing at about 1.5 per cent, just slightly below the 2 per
cent trend rate of productivity growth.
Of course May's strong retail sales were due in part to the tax rebates of
$600 to $2,000 per household from the US Treasury from last month. Many
analysts, therefore, dismissed the gains as misleading. But this was the
wrong response. The role of tax cuts in boosting consumer spending is a
reason for optimism, not scepticism, about the economic outlook. The tax
rebates were designed to boost consumer spending and that is why we have
always expected (in line with the Fed and the US Treasury) to see economic
recovery from this summer. Retail sales figures have now shown that the US
tax cuts are working as planned. They will temporarily boost consumption -
and by the time that this temporary tax boost runs out around Christmas, the
US economy will be starting to enjoy the benefits of lower interest rates,
operating with a lag of 12 to 18 months.
In much of this discussion, my optimism on US economic statistics has been
qualified by the weasel words “so far”. But this can change. Until this
month, sceptics could predict that trouble lay ahead for America once
consumers finally realised that their credit had run out. But the strong
consumer response to the $110 billion tax rebate programme changes the
balance of this argument.
With the rebates flowing into bank accounts and boosting real disposable
incomes, the period of greatest risk for the US economy has passed. For the
next two quarters, disposable incomes will rise at an annualised rate of 8
per cent or more and, given the normal lags between money appearing in bank
accounts and flowing into shop tills, the tax rebates will guarantee
decently strong retail spending between now and Christmas - maybe a
temporary consumer boom. If there were going to be a US recession in
response to the credit crisis, it would have started by now. So let me stick
my neck out and say without qualification - the US economy is out of the
woods.
anatole.kaletsky@thetimes.co.uk
I agree whole heartedly with the proposals of the Scottish pariament regarding the clampdown buying alcohol and binge drinking.
The UK Government should take this on as a policy and go further, only licensed regulated "dedicated" shops should sell alcohol NOT supermarkets. I own three pubs!
Ralph Wilkinson, Darlington,
Inflation in the US is far greater than that proclaimed by economists. The website www.shadowstats.com uses the pre-Clinton procedure and it comes in at around 7%. This means that the USA is well in a strong recession.
Other measures such as unemployment are "sexed-up".
Alfred, Isle of Wight, UK
Anatole has a point. There are fewer overt signs of recession here than I expected. However, if you look at the history of the Depression, it got going in steps with plenty of false recoveries. My own guess is that we will get a two-dip recession, with the second much worse than the first.
jon livesey, Sunnyvale, CA/USA
Four days ago you wrote: "Oil is too important to leave to market forces." It always amazes me how socialists are eager to write columns about economics when it is obvious they don't understand the slightest thing about it. Ask Gordon Brown when to sell gold and you'll get my point.
Bastiat, London,
Your faith in government numbers is laughable. The US GDP figures are calculated using inflation at.... wait for it... 2.6 per cent year on year . Use a more realistic number and the US has been in recession for a long time. What's next from you? The Brown budget deficit is actually a good thing?
Edward, London,
I stick my neck out for no one
Too many self appointed lawmen
Too many ropes
cheers
glenn schaefer, holbrook, usa
Good Grief!
One May retail sales figure and you think it's time to be optimistic. Why don't you want to talk about the retail sales figure for April. March, February and January? One blip does not a boom make.
A modest one off tax rebate to a houshold isn't going to suddenly spur consumers.
Thomas, Sacremento, USA
A recession is always reported after the event. No doubt you'll be the last to report it Anatole...
charles, Cambridge, Great Britain
Pollution levels at Heathrow are already dangerously high. But the government is reportedly seeking a derogation from the EU Directive on NO2 levels. Health takes a backseat when it conflicts with the interests of BA/BAA.
William J Abercrombie, Richmond, UK
1) I have yet to get my stimulus check (the IRS is not that fast).
2) Ssyoy sales adj. for prices have been negative for most outlets since late last year. One exception: Costco, which sells gas.
3) Housing = WEALTH. Note Japan (1991 through 2005). Forget recession. Think slowdown lasting years.
Mark A. Sadowski, Hockessin, USA
The trick here is to look at inflation-adjusted retail sales and to do so on a yoy% basis. As it happens the unadjusted retail sales growth yoy was 2.5%;one should also adjust for gas sales. Real sales was down -1.4% and ex-gasoline the figure was -2.6%. Real gas sales were up 9.8%. Much worse.
Dave Livingston, Bethel, CT., USA
The Republicans have stoked the economy with $110 billion of inflation which the next president will have to deal with. The recession has been delayed until after the elections in November. George's legacy.
cynic, Lowestoft, UK
Two quick points - Firstly, housing and finance may contribute towards a smaller % of GDP but the combinatorial effects of the substantial decline in both are harder to judge and may be more detrimental. Secondly, the economic data appears to neither match sentiment nor account for opportunity cost
Ryan Soh, Aldgate East, England
We should face economic facts as only then can we start to address the issues. How about these: oil dependency, misleading gov statistics, excessive gov commitments, gov debt, personal debt, shadow banking, short termism, inflated money supply, house price bubble, (and lazy media).
Stephen, Cambridge,
'Sales adjusted for inflation..'
You said it Anatole - adjusted for inflation. What inflation - real inflation or the bull that is put out by the government? Look at the adjustment made in May's figures for inflation - lower than 2007.
Look at the underlying assumptions. All lies.
Rob, Isle of Wight,
Oh dear Anatole, you have upset the doom mongers with your unfashionable optimism. Play it safe in future, ignore the facts and write a piece showing how we are all - Britain especially - going to hell in a hand-cart and everyone will be happy.
Alan, Bath, UK
The subprime housing resposessions has not yet even hit maximum and the option-arm, jumbo, alt-a and other mortagages are yet to really start there big defaults. Over? Its yet to get underway.
David McRobert, london, uk
Illusion, delusion, confusion!!! Let's keep the analysis simple. The US and UK economies have unsustainable trade deficits which are echoed by unsustainable consumer and public spending. Printing money won't take the pain of correction away.
Steve Marchant, Broadhempston, Uk
The froth has been in the financial markets, not in the oil price.
Debts and house prices have been rising unsustainably, and it will take many years to unwind.
Oil and gas will continue to rise. They are not making any more.
David Martin, Bristol,
Retail sales are all done on credit cards. When these default as they will, the problem will compound. This is a global recession caused by governments printing money to win votes. And now it will purge itself.
Jon, yeovil,
Isn't the US experiencing a mini-boom because IR were lowered to 2%? When inflation takes hold and their IRs rise, the dollar will strengthen, their exports will become less competetive & we will see a generalised slowdown. The mini boom was created for political expediency, don't be fooled.
Brian Roberts , Plymouth, Devon
By means of the declining dollar, America is exporting its problems - which is exactly what both should do.
Only these problems aren't being corrected, they're merely moving, abroad and in particular to us. Far from ameliorating Britain's economic difficulties, the US recovery aggravates them.
Noel Falconer MEcon, COUIZA, France
Not if you delay it by pumping even more debt into the system.
B Newton, Redland, UK
Soros & Co. speak of recession because their assets are, to a large extent, denomitated in $. Every time the dollar drops they get a billion bit poorer . For rich americans (and financial investor&speculators), devaluation of their fortunes IS recession.
Kaletski is right. It's mostly rhetorics.
Rui, Lisbon, Portugal
There may be no recesion in America, but with huge increases in petrol, food and declining dollar and house prices there must come a moment when Mr & Mrs America stop spending, simply because they have run out of money and probably optimism too. Sometimes these things take on a life of their own....
David Nammory, Liverpool,
Your suggestion that the recession is over merely confirms my belief that exactly the opposite is the case. Well, at least you are consistent. :-)
Ben, Reading, UK
Nobody knows what will happen next week, next month or next year. That's why it's called 'the future'. Movements in prices, economies and employment are essential random over all timescales.
Frank Upton, Solihull,
it really depends how you want to define recession!!!
apprently every day there is a new definition.butby my standards when warren buffet and george soros declare it openly i tend to stick with that rather a journalist from independent.
lets see if you'd publish this!!!!
ebbi britt, valencia, spain
Anatole, until the West starts to pay back its public and private debt, the looming recession is just going to get bigger and bigger. The fact is, debt is being spent not on investment but on consumption. And unless the central banks stop printing at 14% per annum, the price of the $ will suffer.
Sam Smith, Southport, UK
If the official figures systematically understate inflation, as most observers believe, then the real GDP figures are also overstated and the economy is in a recession. I'll take Martin Feldstein's view over Mr kalentsky's anytime.
William Thomson, Manila, Philippines
Not only is the U.S. headed for recession, but so too is the rest of the world. Peak Oil is here and soon global oil production will decline for the first time in history. Global recession will follow: http://www.peakoilassociates.com/PeakOilAnalysisOctober6-2007.pdf
Clifford J. Wirth, Veracruz, Mexico
AK your analysis is a breath of fresh air in this climate of doom and gloom. The credit crunch/housing market in US have had (and still do) their negative side effects but somehow the US economy has kept moving in stark contrast to the pronouncements of sceptical economists. I await your take on UK.
Shahid, London,
"So let me stick my neck out and say without qualification - the US economy is out of the woods." OK, Anatole -- What have you been smoking? Regards, Peter Adam
Peter Adam, chevy chase, MD
Again, we have your usual denial after doing a course at the Gordon Brown school of economics and forecasting.
1st - Not everything has to follow the 'perceived' text book line of events.
2nd - The trauma of price rises and higher rates ahs yet to be fully impacted.
g hamilton, monaco,
My dear Anatole. You are wrong. :-) But for all the right reasons. The tax-cut has kept spending going - for now. But the recession will be even greater as a result. As gas-prices make an ever bigger dent into spending consumption will fall. I will stick my neck -out too: Recession Q3 and Q4.
Arne Wold, Oslo, Norway