INSIGHT: Negative numbers raise renewed recession risks in US

04 August 2011 17:12  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--A recent run of negative economic indicators has nudged the US economy ever nearer to renewed recession, so close that just one more bad news bump could topple it over the edge.

In July, the pace of US manufacturing growth slowed to its lowest point since the end of the recession, with the closely watched purchasing managers index (PMI) showing that the nation’s production industries are on the verge of contraction.

The Manufacturers Alliance reported that while the manufacturing sector remains fairly robust, the rate of production expansion is slowing and has declined for four consecutive quarters.

Most worrisome, the alliance said that its index of new orders for manufactured goods experienced a double-digit drop in the second quarter compared with the same period last year.

In a related data set, the Commerce Department said its measure of new orders for manufactured durable goods fell by 2% in June from May. The department also noted that inventories of completed but unsold durables rose in June, indicating that manufacturers’ output was getting ahead of sales.

Late last week, the department reported that the nation’s second-quarter GDP expanded at a mediocre 1.3% (annualised), well below even the modest 1.8% advance that analysts had been expecting.

Worse still, the department revised its gauge of first-quarter GDP sharply downwards, from the initial estimate of 1.9% to a barely breathing 0.4% – for an average annual GDP growth rate of less than 1% for the first half of this year.

The Conference Board’s index of leading economic indicators did show a narrow 0.3% gain in June, but the board’s economists noted that the recovery continues to slow.

In similar vein, the National Association for Business Economists (NABE) has scaled back its expectations for 2011 economic development, with fewer business analysts now hopeful of full-year GDP growth of 2%.

In normal times, the US economy would be expected to grow at 3%–3.5% annually.

To make any headway in reducing the nation’s 9.2% unemployment rate, the economy has to grow at a pace of 2.5% or more.

Not surprisingly, with first-half GDP growth of less than 1%, the US unemployment picture is looking grim.

The Labor Department will issue its employment situation report for July on Friday, and analysts are worried that the nation’s jobless rate could edge higher still, above 9.2%.

As a possible portend of Friday’s official employment report, on Wednesday outplacement specialists at Challenger, Gray & Christmas reported that “an unexpected burst in private sector downsizing pushed the number of announced job cuts to a 16-month high of 66,414 in July”.

The firm said that July’s job reductions were 60% higher than in June and nearly 60% ahead of the pace seen in July 2010.

Company president John Challenger noted that “July marks the third consecutive increase we have seen in monthly job-cut announcements, which certainly seems to provide additional evidence that the recovery has stalled”.

“What may be most worrisome about the July surge is that the heaviest layoffs occurred in industries that, until now, have enjoyed relatively low job-cut levels, including pharmaceuticals, computer and retail,” he said.

As the jobs picture darkens, those who have regular pay checks get increasingly uneasy about their own employment security, so they pull back on spending.

That was demonstrably reflected in Tuesday’s Commerce Department report that US personal income growth essentially was non-existent in June, and consumer spending actually fell in the month – the first decline in 20 months.

The department’s report said: “Private wage and salary disbursements decreased $2.2bn (€1.54bn) in June, in contrast to an increase of $15bn in May."

“Goods-producing industries’ payrolls decreased $1.8bn, in contrast to an increase in May of $4.8bn,” the report said, noting too that payrolls in manufacturing, service industries and government also declined.

Finally, the department said that personal consumption expenditures – also known as consumer spending – fell by nearly $22bn in June in contrast to May’s $6bn gain.

With consumer spending accounting for as much as 70% of all US commercial activity, the downturn in personal expenditures in June is not a good sign, to say the least.

“The economy is vulnerable,” said Kevin Swift, chief economist at the American Chemistry Council (ACC), “so there is the potential for any significant shock to send the economy into recession again.”

Earlier this year, Swift said that the chances of a new US recession were about 20%. He raised that probability to 25% in June.

“I’d say now that the odds on a new recession are about 30%,” he said.

“We’re now entering the third year of post-recession recovery, and most indicators are weakening,” he added. “US manufacturing industries and global manufacturing are just above stall speed, and even the services sector is weak.”

What potential economic shocks might be sufficient to push the wobbly US recovery into a new recession?

“You’ve got the sovereign debt crisis in Europe, a possible hard landing in China, maybe a disruption in energy supply,” Swift said. We could wake up one morning to find that there has been a regime change in a major oil exporting country.”

“There’s a lot of uncertainty out there,” he said.

Still, a 30% chance of a new recession also means a 70% probability that the recovery will stumble on, perhaps even get a second wind.

Daniel Meckstroth, chief economist at the Manufacturers Alliance, noted that much of the recent bad economic data has been about manufacturing, which makes up only 11% of the nation’s overall economy.

“There is no question that the whole economy slowed in the first quarter, but we can’t over-weight manufacturing,” he said.

Meckstroth also pointed to a handful of one-time negative events that helped slow the US recovery in the first half of this year, including heavy winter storms, spring flooding along the Mississippi and Missouri Rivers, and supply disruptions due to the Japan tsunami – all of which affected US factory production.

The first-quarter spike in energy and food prices diminished consumers’ disposable incomes, he noted, and helped trigger reduced spending in other areas.

The effects of those multiple negative first-half events are beginning to unwind, Meckstroth said, and he expects pent-up consumer demand for durable goods and automobiles to boost sales in the second half of this year.

“Purchases of business equipment continue to be strong, a real bright spot, and we expect that to continue along with ongoing strength in exports,” he said, “and these are all reasons why we think the second half will be stronger.”

Even so, Meckstroth agrees that the US economy remains fragile. “But it would need a substantial shock to send it into another recession,” he said.

 ($1 = €0.70)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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