Slower growth for US economy amid threat of recession

PETALING JAYA: All signs point to slower growth ahead for the United States economy as a largely jobless recovery threatens to dip into a recession in the coming months.

Although the US economy is still the largest in the world as measured by nominal gross domestic product (GDP) and purchasing power parity, its health has been the focus of concern among investors over the past week.

Martin Feldstein, a member of the business cycle dating committee of the National Bureau of Economic Research (NBER) and a Harvard University economics professor, said in a recent interview with Bloomberg that there was now a 50% chance that the economy would slide into a recession.

“This economy is really balanced on the edge,” he said.

Fellow committee member and Stanford University economics professor Robert Hall said the slower the growth rate, the the greater the likelihood of a recession due to an adverse shock.

“Consumption is down because debt repayments are squeezing spending even this long after the crisis,” Hall said, adding that it would be a painful process until debt-dependent consumers were back on their feet.

Five of the nine members of the committee now hold views that the essentially jobless two-year tepid recovery of the US economy would likely see a slower pace of growth.

Christina Romer, a former chairman of the White House council of economic advisers and a professor at the University of California, Berkeley, predicted “anaemic, but positive, growth”.

“The risks have gone up for another recession compared to where we were six months ago,” she said.

Since conventional wisdom holds that markets usually anticipate the economy by around six months, then jittery global investor sentiments in the past week could be the harbinger of a worsening outlook and not just for the US economy.

Already, the first-half of the year has signalled that US growth has faltered. GDP for the first quarter was sharply revised downwards to 0.4% from 1.9%, while GDP growth for the second quarter was up 1.3% as weak consumer spending followed the deteriorating labour market conditions.

Personal spending contracted 0.2% in June from being virtually unchanged in May. The median forecast was for a 0.1% growth in spending.

According to economists, the unemployment rate would likely stay at 9.2%. Although the more forward-looking new jobless claims have hovered around the 400,000-level in the past four months to the end of July, indicating more sustainable job creation, the focus would be on the non-farm payroll numbers issued by the US Labour Department.

Economists expect non-farm payroll to grow by a median 85,000 in July from 18,000 in the previous month. A report by payrolls processor Automatic Data Processing Inc showed only modest improvement in private-sector payrolls, which rose by 114,000 in July from June’s 157,000. the median forecast was for a 100,000 increase.

However, a report by outplacement firm Challenger Gray & Christmas Inc showed layoffs in the private sector surged 60% to a 16-month high of 66,414 in July compared to June largely due to cutbacks from a few big firms.

A forward indicator, the Institute for Supply Management’s US purchasing managers index (PMI) for the month of July saw a decrease in factory orders to 50.9 from 55.3 in the previous month, more than the 54.5 median forecast in a Bloomberg survey.

Meanwhile NBER panel member and Harvard University economics professor James Stock said business confidence had been shaken by the months-long debate over raising the debt ceiling.

“The US debt ceiling debate has, I think, really eroded confidence among consumers and businesses in addition to creating uncertainty,” he said.