The US may be on the cusp of a recession for the first time in more than two years.
Stagnant payrolls in August reported last week added to data over the past month showing the economy is faltering, including slowing manufacturing, plunging consumer confidence, falling home values and lower bond yields and stock prices.
“At this stage of the typical expansion we expect above- average growth and instead we are barely seeing any growth at all,” said James Hamilton, an economics professor at the University of California, San Diego, who has advised Federal Reserve banks and studied what tips the US into downturns. “We have to be more worried. Overall, the economy is in a delicate position and another shock could send us down.”
September could mark the start of the slump, said Julia Coronado, chief economist for North America at BNP Paribas in New York, who predicts the economy will shrink at a 2 per cent annual rate in the fourth quarter. Economists at UniCredit Group and Mesirow Financial Inc. also say the US is at risk of tipping into the first recession since the last one ended in June 2009.
“When there are no jobs and no income, there will not be a lot of spending either,” Coronado said.
Gross domestic product peaked in April and declined in May and June, according to monthly tracking of output by St. Louis- based Macroeconomic Advisers LLC that is used by the National Bureau of Economic Research in dating contractions.
“I’d put the odds at 50-50 or maybe a little higher,” said Diane Swonk, chief economist at Chicago-based Mesirow Financial, which has $57 billion in assets under management. “At best we are treading water. What you are worried about is the next wave will push you under.”
Private Hiring
Private hiring, which excludes government agencies, climbed 17,000 last month, the smallest increase since a decline in February 2010, the Labor Department said Sept. 2 in Washington. The jobless rate held at 9.1 per cent.
Hourly earnings and hours worked both declined, reducing the incomes of consumers whose spending accounts for 70 per cent of the world’s largest economy.
Employment is one of the indicators the NBER’s Business Cycle Dating Committee uses in determining a recession. It defines a recession as a period of falling activity spread across the economy, lasting more than a few months, normally “visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” By contrast, some economists define a recession as two consecutive quarters of contraction in GDP.
‘Worrisome’ Trend
“The trend is worrisome,” Jeffrey Frankel, a Harvard professor on the NBER committee, said after the jobs report. While he doesn’t expect to make an official recession call, he says, “This is a long slump we’re in. In that sense it’s like the 1870s or 1930s. You have a recovery but not enough to create jobs or get the economy going.”
Historically, it takes between six and 21 months to determine a recession’s start and end. The last recession, which began in December 2007 and ended in June 2009, was the deepest since World War II. Gross domestic product shrank 5.1 per cent from the fourth quarter of 2007 to the second quarter of 2009, revised Commerce Department figures showed in July.
University’s Martin Feldstein, another member of the nine-person NBER committee, said on August 26, “We’ve got a better-than-even chance that we’re going to be sliding into what will be called a recession.”
The former chief economic adviser to President Ronald Reagan predicted drops in “production, employment and sales and so on going forward.”
Fed Action
Last week’s jobs report makes it more likely that Chairman Ben S. Bernanke and his Fed colleagues will take further steps to protect the recovery when they meet Sept. 20-21, economists said.
One possible move: replacing short-term Treasury securities in the Fed’s $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, according to economists at Wells Fargo & Co. and Goldman Sachs Group Inc.
At least two Fed presidents said in the past 10 days that signs of a recession could prompt more easing.
Dennis Lockhart, president of the Atlanta Fed, said Aug. 31 that additional large-scale securities purchases might be needed in the event of “deflationary pressures developing or moving clearly in the direction of recession.”
James Bullard, president of the St. Louis Fed, said on Aug. 26, “If the economy is weaker and the inflation picture moderates, we could consider more action.”
Stocks Plummet
Political squabbling over the budget and mounting concern about a default in Europe caused the Standard & Poor’s 500 Index to plummet 17 per cent from July 22 to Aug. 8, prompting companies and consumers to cut back. Declines of that size have occurred just twice without signaling a recession, according to figures going back to at least 1970 from ISI Group Inc.
“Companies have held back on hiring activity and become more cautious because of politics and uncertainty,” which may be leading to a “self-fulfilling prophesy” or vicious cycle in which declining confidence leads to lower activity, said Harm Bandholz, chief US economist at UniCredit Group in New York.
The Thomson Reuters/University of Michigan measure consumer sentiment fell last month to the lowest level since November 2008. The Bloomberg Consumer Comfort Index has been stuck below minus 40, the level associated with recessions or their aftermath, since the end of February.
“I had been saying for three months we wouldn’t have a double dip, but I am losing that discussion,” said Tony Raimondo, chairman and chief executive of 900-employee Behlen Manufacturing Co., which makes agricultural equipment and commercial buildings in Columbus, Nebraska. “All the data, the momentum, the emotions say the country is in the doldrums.”
Manufacturing Slows
Manufacturing, which helped pull the economy out of the last recession, is losing momentum. The Institute for Supply Management’s factory index fell last month to 50.6, the lowest in more than two years. Figures less than 50 signal a contraction.
Gross domestic product, adjusted for inflation, cooled to a 1.5 per cent rate in the second quarter from a year earlier. About 70 per cent of the time when the pace has fallen below 2 per cent, a slump has followed within a year, according to data since World War II in an April study by Jeremy Nalewaik, a Fed board staff economist.
The shrinking gap between the 10-year Treasury note yield and the target for the federal funds rate may be another recession indicator, according to Paul Kasriel, chief economist at Northern Trust Corp. in Chicago.
Benchmark Rate
With the benchmark rate on overnight loans among banks stuck at near zero since December 2008, the spread between short-term and 10-year rates has declined in tandem with the falling 10-year yield. The 10-year yield fell to 1.99 per cent on Sept. 2, from 3.77 per cent in February.
Some economists aren’t ready to conclude a recession is inevitable. For one, the August payroll figure was pulled down by a strike at Verizon Communications Inc. involving about 45,000 workers.
Also, while “soft data” such as business and consumer confidence determined by surveys points to recession, most “hard data” including reports of sales and production continue to expand, said Michael Gapen, senior US economist at Barclays Capital Inc.
“Downside risks are certainly elevated, and there are several risks that could indeed tip the economy into recession but things like higher uncertainty alone historically are not something that by themselves send the US economy into recession,” he said.
Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said it takes three months of declining payrolls to signal a downturn.
“There is no recession,” he said. “We are not even at stage one alert yet.”
