30/01/2008
Economic storms ahead | Investment Week - 21st January 2008
Despite ostensibly robust growth over the middle of 2007, the outlook for the US economy has been rapidly deteriorating. Indeed, various commentators have described the economy as facing a “perfect storm” in 2008. The ongoing correction to the housing market bubble still has some way to run, with housing starts likely to fall a further 20% this year. The credit crisis shows little sign of being resolved, with speculation that the final level of losses will be a lot higher than presently anticipated. And, on top of that, surging food and energy prices are squeezing household balance sheets. The probability of a recession has, consequently, been increasing over the past six months.
The National Bureau of Economic Research (NBER) is the body that is entrusted with identifying the path of US economic cycles and, specifically, with the timing of the onset of recessions. They now regard the likelihood of one as being more likely than not. Certainly, key statistics increasingly point in that direction. The latest survey of manufacturing revealed a contraction in the level of activity in that sector, albeit still above the level that would signal a whole economy contraction. All of the previous corrections to housing bubbles have entailed full-blown economic recessions, and this one may be no different.
Many commentators refuse to acknowledge the possibility of a recession until it is reflected in the labour statistics. However, December’s payroll report contained several worrying signs that the risks are rising. The overall unemployment rate surged to 5%, from a cycle trough of 4.4%. Now, in previous periods when unemployment has risen by such a degree, it has been accompanied by a recession. Looked at from the employment side, year-over-year employment growth has slowed to just 0.9%, well below the 1.6% rate of growth consistent with a soft landing. Overall, private sector employment is now contracting.
Historically, the NBER does not announce a recession until well after it has commenced, but a growing preponderance of evidence suggests that on this occasion it may not be long before they pass judgement. The authorities will have to move quickly, and with sufficient force, to try to mitigate the impact of this “perfect storm”, and to nurture some prospect of the beginnings of recovery in 2009.
Douglas Roberts, Senior International Economist at Standard Life Investments.
This article was published in Investment Week on 21st January 2008
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