The U.S. begins a recession

The US begins a recession

It’s not official but it has begun. The United States is now in recession.

A recent issue of the prestigious Economist magazine points to signs of recession in the world’s largest economy -- —a jump in the unemployment rate to 5.1 percent and the loss of 98,000 private-sector jobs in March, the fourth consecutive month of decline; surveys of manufacturing and services, and Federal Reserve Chairman Ben Bernanke admitting on April 2 that output was unlikely to “grow much, if at all, over the first half of 2008 and could even contract slightly.” Since December, the US economy has lost about 80,000 jobs a month. In a full blown recession, job losses will be twice that.
The usual definition of a recession is two consecutive quarters of decline in economic output. That has not taken place. On Feb. 14, when I interviewed her, President Arroyo said the US was not yet in recession, using the classic definition. At that time though, the rice crisis was not yet apparent. Arroyo had thought she would pump-prime the economy with infra spending to cushion the Philippine economy from a US slump.
However, the US National Bureau of Economic Research (NBER)—defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.” Using this criteria, many economists, including those with The Economist, believe the US is now in recession.
The question then is: How long will the recession last? Albay Governor Joey Salceda believes the US slowdown will be short and sharp. He thinks if the Philippines grew by 7.3 percent in 2007, it will grow by between 5 and 6 percent this year, a drop of two percentage points at worst because of a US slowdown. Government economists project GDP growth rate of 6.3 to 7 percent this year.
The Economist Magazine is surprised that the slowdown “seems remarkably gentle, given that many think America is suffering its worst financial shock since the Great Depression.”
It predicts that the “labor market will surely worsen as firms cut back in the face of weaker consumer spending. But a buoyant world economy is still boosting American exports; a fiscal stimulus is on the way; real interest rates are around zero and likely to fall further; and, with the rescue of Bear Stearns, the Fed has given an implicit guarantee to Wall Street. So few forecasters expect outright slump. A liberal enough loosening of fiscal and monetary policy can stop recession turning into depression, and American policymakers have left little doubt that they will use their recession-fighting weaponry freely.”
In the Philippines, Filipinos are not as concerned with a US recession as they are with vanishing rice stocks and rapidly rising prices of basic commodities – rice, corn, pan de sal, LPG, canned goods, and vegetables.
Former Finance Secretary Cesar Virata, in my talk to him, estimates inflation this year to be hitting 12 percent. In 2007, headline inflation was hitting 4.9 percent while bank lending rate was 6.9 percent.
If inflation rises to double digits, then you have a negative real interest rate, meaning inflation is higher than the cost of borrowing money. Simply translated, when you buy a car or a house using borrowed money, you in effect gain because the price (of what you buy) is rising while the interest rate has remained the same.
In its latest World Economic Outlook, published on April 9, the IMF slashed its forecasts for America's economy for bot 2008 and 2009. The Fund now expects US GDP to shrink in every quarter of this year. By the fourth quarter the economy will be 0.7 percent smaller than a year before. (Only three months ago the fund expected a rise of 0.9 percent.) In 2009, US GDP will grow, but at well below its trend rate.
Recent US recessions, as defined by the NBER, have been both short and shallow. The recessions of 1990-91 and 2001 each lasted eight months, below the post-war average of ten. If the Fed is right, the 2008 recession may be shorter and shallower still. “That would be remarkable, given the extent of the housing bust and credit turmoil,” The Economist points out.

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