Feldstein warns of potential for new US recession

Recessions.pngThere is worrying evidence that the US may be close to recession.

This may seem unlikely to those who have only known the world of the past 25 years. Between 1982-2007, US recessions were very rare. They took place just 5% of the time, as the wealthy Western BabyBoomers led to a SuperCycle of ‘pent-up demand’ during any slowdown.

But before 1982, the economy was in recession for 35% of the time.

Now, the US’s best forecaster fears it may be close to a new downturn.

Readers may remember that in May 2008, the blog championed Martin Feldstein’s view that recently released US GDP data was “grossly misleading“. It felt he was in a good position to know, as chairman of the official panel that dates US recessions.

In July 2009, the US Commerce Dept finally admitted Feldstein had been right. The recession had indeed begun in December 2007, as he had said. The Commerce Dept noted that “the first 12 months of the US recession saw the economy shrink more than twice as much as previously estimated“. Grossly misleading, indeed.

Now, Feldstein has been analysing the details of the US Q1 GDP report. His conclusions are alarming:

• Q1 GDP growth dropped to 1.8%, from 3.1% in Q4
“Two-thirds of that 1.8% went into business inventories”
• “Final sales growth was at an annual rate of just 0.6%”
• “The actual quarterly increase was just 0.15%”

Feldstein then goes on to note that “after a temporary rise in March, the economy began sliding again in April“. He adds that so far, May’s data “are even worse than April’s“. Equally, the blog’s own Downturn Alert suggests companies have been destocking for the past 6 weeks, since oil prices peaked.

It is still too early to be sure that we are entering a recession. But the evidence of the past 40 years would suggest Feldstein is right to worry. The above chart shows US recessions (shaded areas) and the oil price in $2011 terms (red line). A recession followed every time the oil price rose above $50/bbl. This happened in 1973/4, 1979/80, 1990/1 and 2007/8.

Today, as in May 2008, the consensus is ignoring Feldstein’s argument. Most companies still have a strongly bullish outlook, and some even believe a new SuperCycle may be underway. But Feldstein was right before, and his new warning deserves to be taken very seriously.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


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