The Looming US Recession

Source : The Business Times, August 4, 2008

By MARTIN HUTCHINSON

SECOND-quarter US gross domestic product (GDP) rose 1.9 per cent, largely thanks to tax-rebate cheques sent out as part of the Bush administration's economic stimulus package.

Exports and government spending were growth areas. But weak personal finances and sub-par economic growth suggest further credit problems ahead. An official US recession may only be delayed.

The US economy's trajectory is difficult to divine, and quarterly GDP figures don't help. In 2001, recessionary quarters appeared and disappeared as revisions were made to estimates, before it was finally determined that no recession occurred by the official definition of two consecutive down quarters.

The annual revisions in 2005-2007 GDP figures this month have changed the overall trajectory only modestly downwards, but a 2006 'statistical discrepancy' of 1.2 per cent of GDP (US$163 billion in real money) suggests there is still considerable uncertainty.

Between mid-2006 and mid-2008, according to this month's figures, three quarters of sub-par growth averaging 0.8 per cent - recessionary in practice, given one per cent US population growth - were followed by two quarters of enthusiastic 4.8 per cent growth, which have now been followed by another three averaging 0.8 per cent. During the two quarters of strong expansion in mid-2007, the largest credit crisis in decades exploded.

Certainly, nobody noticed strong growth at the time. It is thus questionable what exactly quarterly GDP figures really mean.

Still, this time there appear to be some negative indicators. The government's stimulus package, mostly implemented in May and June, added about US$130 billion to personal income, representing 4.2 per cent of its nominal 7.4 per cent rise - without this, income would have risen less than inflation.

Personal savings rose only US$60 billion in the quarter, so less than half the package remained at June 30 to stimulate subsequent consumption. That suggests that the financial squeeze on the consumer, alleviated during the second quarter, could worsen in the rest of 2008.

With the consumer under strain, house prices continuing their decline (albeit possibly more slowly) and GDP growing at best sluggishly, debt problems are likely to increase in both the consumer and high-yield corporate sectors. That suggests a continued likelihood of recession, even by the official definition, in the months ahead - but it could be 2010 or later before we know it.