Posted by Editor on February 7th, 2008
Earlier today, MarketWatch reported that Nigel Gault, U.S. chief economist for Global Insight, now believes the U.S. economy is in a recession. Massachusetts-based Global Insight is recognized as the most consistently accurate forecasting company in the world, with over 3,800 clients in industry, finance, and government. In a research note released Thursday, Gault predicted a 0.4% drop in gross domestic product this quarter and a 0.5% decline next quarter. Mr. Gault is part of a growing number of economists who are now saying the United States is in an economic recession.
Caroline Baum of Bloomberg wrote an interesting article yesterday entitled “U.S. Recession Indicators Are All Pointing South.” Baum stated that it now appears the four indicators used by the National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) to assess turning points in the economy have peaked. She wrote:
Not by very much, mind you. And not for sufficiently long for the BCDC to make a determination that a recession has begun. The committee typically waits anywhere from six to 18 months after a recession has started to make it official.
As it now stands, though, the four indicators are all off their highs, with industrial production and real personal income less transfer payments peaking in September, real manufacturing and trade sales in October, and, most recently, employment in December.
“When all four kind of go south — as well as a fifth, Macroadvisers’ monthly GDP index – it’s a strong signal saying we need to start worrying,” says Maurine Haver, president of Haver Analytics, a provider of databases and software products for economic analysis.
Baum also spoke to Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago, who wrote in his latest published forecast that, “Our bet is that the U.S. economy has entered a recession.” Kasriel explained that the recession will be “dominated by weakness in household spending,” as households ran a deficit (spending more than their after-tax income) from 2001 through 2007. The award-winning economist said that from 2003 to 2005, inflation-adjusted money market rates were either low or negative, which created a disincentive to save. Since home prices rose faster than the cost of carrying them (mortgage rates) and mortgages were widely-available, “household borrowing relative to disposable personal income hit a postwar record in 2006,” said Kasriel.
Further evidence of a U.S. recession appeared on Tuesday, when the ISM non-manufacturing index fell to a reading of 41.9% for January, down from 54.4% in December and the lowest level since October 2001. Readings below 50% indicate most firms are contracting. Greg Robb of MarketWatch wrote after the report’s release that, “For economists, the data from the Institute for Supply Management was the clearest signal to date of a recession.” Josh Shapiro, chief U.S. economist at MFR Inc., told the news service, “The reading for the ISM non-manufacturing composite, if sustained, is consistent with recession.”
Also last Tuesday, Chris Isidore of CNN Money wrote:
A growing number of top economists believe that the U.S. economy has now toppled into recession…
Some economists argued that the normally low-profile ISM services reading, coupled with the government’s report Friday showing the first monthly net loss in jobs in more than four years, is proof that recession is now a reality.
Keith Hembre, chief economist of First American Funds, told CNN Money that:
My forecast had been that the recession would begin this quarter, but the hard data wasn’t there yet. But now we’re seeing that. The service sector is a much larger component of the economy [than manufacturing] and this is very much a recession reading.
CNN Money’s senior writer said that economists took the latest report as a sign problems are no longer restricted to just housing and manufacturing. Gus Faucher, director of macroeconomics for Moody’s Economy.com, told CNN Money his firm now believes the economy is in a recession. Faucher said:
We’re definitely seeing conditions spread to more parts of the economy. The big drop in business activity, that’s a huge red flag.
Economist Bob Brusca of FAO Economics said he doubted that the U.S. was in recession a week ago, but now believes there is about a 75% chance that a recession began last month. Brusca explained:
That’s what recessions do. They come upon you all of a sudden. When you look back at history, you’re struck by how even-keel it is until the bottom just falls out.
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