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Business

US recession spells global gloom

Video by George HARRIS

Latest update : 2008-12-02

The United States is the latest economic powerhouse to have entered a recession, casting a shadow over a struggling global economy. In fact, economists now say, the US economy has been contracting ever since December 2007.

AFP  -  The United States officially joined the ranks of the recession-hit economies, but debate is still raging on how long and how deep the downturn will be.

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the panel recognized as the official arbiter of business cycles, said it made the determination the recession began in December 2007.

Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn, including data on employment, income and industrial output.

Because of the lag time in officially declaring a recession, some analysts say the worst is generally over by the time the news becomes public.

But John Ogg, analyst at 24/7 Wall Street, said it may not be the case this time: "We still think more pain is on the way."

That message was hammered home with a survey showing the US manufacturing sector sank to its lowest level of activity in November since 1982.

The Institute of Supply Management said its manufacturing index slumped 2.7 points to 36.2 percent, far below the 50 percent level that separates expansion and contraction.

Analysts pointed out the overall economy will have trouble escaping deep recession with manufacturing so weak.

"The worsening credit crisis and deepening global slump have pushed the ISM index below the 41 figure that is consistent with past recessions," said Sal Guatieri, economist at BMO Capital Markets.

"The fact that the index continues to decline points to more than your garden-variety downturn."

Many analysts have been saying the recession has been raging for months.

"So far in 2008, employers have slashed 1.2 million jobs, and the bad news is expected to continue when we get employment data for November this Friday," said Michael Fowlkes, analyst at Investor's Observer.

"Recession fears have now become a reality, and the questions that remain are just how bad and for how long this recession will linger over us."

Augustine Faucher at Moody's Economy.com said his firm expects the downturn to last through the first half of 2009 and to be "the worst of the post-World War II era."

"Even with a substantial stimulus package, unemployment is likely to peak close to 9.0 percent in early 2010," he said.

According to official government data, the US economy contracted at a 0.2 percent pace in the fourth quarter of 2007 but grew 0.8 percent in the first quarter and 2.8 percent in the second quarter of 2008. It then contracted 0.5 percent in the third quarter, based on a provisional estimate.

But the gross domestic product (GDP) data may have been skewed by tax rebates that stimulated consumer spending, according to analysts.

A major factor in determining recession is employment, which has been declining since last December, the panel said. Other factors include monthly data on income, manufacturing and retail sales.

The NBER makes no forecast on how long a recession will last, but said that in the past they have run from six to 18 months. The panel said it has no definition of the term "depression."

Federal Reserve chairman Ben Bernanke said meanwhile the current economic situation bears "no comparison" to the much deeper crisis of the 1930s Great Depression.

"I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison," Bernanke told an audience in Austin, Texas.

Bernanke said the situation in the 1930s represented "very difficult circumstances," because "we didn't have the social safety net that we have today. So let's put that out of our minds; there's no -- there's comparison in terms of severity."

Brian Wesbury at First Trust Portfolios said there are signs the recession may end soon because of how it developed.

"This time around, the recession is not due to tight monetary policy, higher tax rates, or protectionism," he said.

"It's due to a sudden and sharp plunge in the velocity of money -- what we have been calling 'risk aversion hysteria' -- where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings."

Wesbury said indications that holiday shopping is better than expected "may be an early sign that the bearishness went way too far."
 

Date created : 2008-12-02

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