US sees light at end of the tunnel


Financial Times | June 3 2009

By Krishna Guha and Sarah O’Connor

Is the US recession over? A handful of bullish economists are starting to claim that it is, or that it very soon will be

“The trough of the recession is imminent, if it has not already been passed,” said Neal Soss, chief economist at Credit Suisse.

“I have declared the recession (almost) officially over,” Marc Prado, market strategist at Cantor Fitzgerald, told clients this week. “The May data clearly has turned the corner.”

This is still very much a minority view. Most economists think the economy is stabilising but the low point has not yet been reached.

“It is not impossible. But it seems early to me, with payrolls still contracting at 500,000 plus as of May,” said Jan Hatzius, chief economist at Goldman Sachs.

Richard Berner, chief US economist at Morgan Stanley, agrees. “I think a few months later – perhaps September to October.”

The National Bureau of Economic Research business cycle dating committee, which decides when recessions begin and end, has not even begun discussing the end date and will probably not reach a verdict for 18 months or more.

But the fact that the end of the recession is being discussed at all is a sign of how far the debate has moved on. The “recession is over” camp highlights new claims for unemployment benefits and new orders for manufacturing goods.

Robert Gordon, professor at Northwestern University and a member of the NBER business cycle committee, recently published research that shows past recessions typically ended four to six weeks after new unemployment claims peaked.

The latest data, to the end of May 23, suggests new claims may have peaked at nearly 660,000 a week.

“My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009,” Mr Gordon said.

US labour market, manufacturing

The ISM manufacturing survey for May rose to 42.8 – consistent with past recession troughs. The new orders index rose above 50 to 51.1 for the first time since December 2007, when this recession began.

“The 51.1 reading points to a big swing in industrial production over the next few months – from steep contraction to flat or even modest expansion,” Credit Suisse’s Mr Soss said.

The Conference Board consumer confidence survey jumped from 40 to 54.9 in May, while data suggest housing has bottomed in volume terms even if prices are still falling.

Nonetheless, most experts remain sceptical that the recession is already over. 

The NBER committee takes a broad overview of economic activity, emphasising gross domestic product but also looking at aspects such as monthly employment, personal income, manufacturing output and wholesale sales data.

Most forecasters think the economy will only start growing in the second half of the year. The ISM non-manufacturing survey showed that service sector activity only inched higher in May while new orders fell slightly. This is a reminder that while manufacturing may get a decent lift as the inventory cycle ends, the much larger service sector may not.

Even new unemployment claims remain higher than in the worst month of the last recession. Real disposable incomes have risen only because of stimulus tax breaks and higher benefit payments. Consumer spending, adjusted for inflation, fell in March and April.

Mr Frankel said he would be looking for a break in payrolls data to corroborate the notion that the economy was bottoming. 

Martin Feldstein, another Harvard professor and NBER cycle dating committee member, said “it is possible but unlikely” that the recession is already over.

“I think it is a more likely scenario that we are seeing the favourable effects of the fiscal stimulus,” he said. “That, for a while, will offset the general diminished trend we have seen over the past two quarters, but it is a one-shot thing.”

Most economists think a relapse is unlikely and that easing financial strains and ongoing ultra-low interest rates will support at least a muted recovery.

But if Mr Feldstein is right, there is a risk of a double-dip recession – or a renewed bout of weakness so close to the original one that it will ultimately be judged to have been part of the same recession.

Copyright The Financial Times Limited 2009


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