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US escapes recession

Created:
19 February 2008
Written by:
Chris Dillow

The US might avoid recession this year, the latest figures suggest.

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These show that industrial production rose 0.1 per cent in January. That means that output is 2.3 per cent up since last January, and 0.3 per cent above its average level in the fourth quarter (Q4). This is a long way from recessionary conditions; in the last recession - which is regarded as the mildest in US history - output fell 3.8 per cent. And retail sales rose 0.3 per cent in January, also leaving them 0.3 per cent above Q4's level, although some of this rise reflects higher prices rather than real growth.

These numbers seem to corroborate Federal Reserve chairman Ben Bernanke's view, expressed last week, that the economy is experiencing a "period of sluggish growth" rather than falling incomes. This is heartening because if the US avoids recession now or very soon, it might escape one altogether. This is because later this year the economy will be boosted by the lagged effects of recent cuts in the Fed funds rate and the weak dollar, and possibly of President Bush's recently-passed tax cut programme.

Not everyone is so confident, though. "Our recession call is on track," says Morgan Stanley's David Greenlaw. He believes that companies' cuts in their inventories of unsold goods will cause GDP to fall by an annualised 0.5 per cent in the current quarter. Survey evidence supports his pessimism. The University of Michigan's measure of consumer confidence has fallen to its lowest level since 1993. And the Empire State manufacturing index - a survey of industrial conditions in the New York area - has fallen to a five-year low.

Also, the labour market is weakening. In the last four weeks, new claims for unemployment insurance benefits averaged 347,250, up from 343,200 in December.

All this matters for two reasons. One is that if the US can escape recession, banks' losses on mortgage defaults won't be so horrendous, and so the credit crunch will be less severe. The second is that there's been a close correlation (0.61 since January 1996) between annual changes in US industrial production and the All-Share index. This suggests that any pick-up in the US economy will raise investors' appetite for risk, thereby giving shares a boost.

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