Britain shivers as US hits recession
AMERICA’s economy is definitely in recession, economists say, amid growing fears that the credit crunch is entering its most dangerous phase.
Figures on Friday showing a second successive monthly fall in US employment sealed the question of whether America had entered its first recession since the 2001 downturn.
The US lost 63,000 jobs in February, said the Department of Labor, amid the fastest fall in private-sector jobs in five years. The decline, which followed a 22,000 drop in January, the first fall in more than four years, surprised many economists who had been expecting a slight rise. Manufacturers and construction companies led the decline as they absorbed the costs of the housing slump.
“The debate is over,” said Paul Ashworth, senior US economist at Capital Economics. “The 63,000 decline in nonfarm pay-rolls in February is near-conclus-ive proof that the economy is now in recession.”
In a note to investors, Joshua Shapiro, economist at MFR, described the jobs numbers as “a terrible report” that signals “no support at all now for consumer spending growth”.
Both the White House and the US Treasury continue to argue that the American economy is not in recession. Opinion continues to mount up against them, however.
The National Bureau of Economic Research, the body that is regarded as the official arbiter of whether America has entered a recession, will not issue its formal verdict for some months.
But Martin Feldstein, who has headed the bureau for three decades, told The Sunday Times: “On the basis of the available evidence, I would say we are in recession. But numbers get revised. And the delayed effects of the monetary and tax stimulus could kick in and pull the economy back onto a growth path.”
On Friday, Larry Summers, the former US Treasury secretary, said the economy is “currently in recession” and warned that it was likely to be severe in its length and depth.
“I believe we are facing the most serious combination of macroeconomic and financial stresses that the US has faced in a generation - and possibly, much longer than that,” he said, addressing an annual economics summit organised by Stanford University in California.
Summers said there was “a regrettable reluctance in Washington to recognise the ‘R’ word” and that the situation was likely to get worse. Official estimates of the cost of the housing and mortgage bust, put at $400 billion (£199 billion), were likely to be “substantially optimistic”.
The worry is that a prolonged recession will send house prices down further, undermining the banks and thus hitting the financial markets with a double blow.
His comments came as another leading Wall Street forecaster joined economists from Global Insight, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS in saying that America had definitely entered a recession. Ethan Harris, chief economist at Lehman Brothers, said: “We now believe the tax-rebate cheques will arrive too late to prevent an outright recession. We look for modestly negative GDP growth in both the first and second quarters of 2008.
“The economy is likely to experience an extended period of very weak growth, a rising unemployment rate and significant further Fed rate cuts,” he added. “This is a bigger, but more gradual, shock to the economy than either the 1990 or 2001 recession.”
The gloomy news led to a sharp fall in shares on Wall Street, the Dow Jones industrial average falling by 147 points to 11,894, for a two-day fall of 370 points. All three important US market indexes are at their lowest level since 2006.
It followed another attempt by the Federal Reserve to ease strains in the credit and money markets. The US central bank said it would add as much as $200 billion in liquidity over the next month. The Fed said it was responding to a rapid deterioration in the credit markets and was acting to help its beleaguered Wall Street banks.
“All the lights are flashing red,” said Nariman Behravesh, chief economist at Global Insight. “We’re in a recession. I don’t think there is any doubt about it at this point.”
Bruce Kasman, chief economist at JP Morgan, said: “We now think the economy can be described as having entered a recession in early 2008.”
The deepening gloom means that the Fed is likely to slash interest rates further from the current 3% level.
Analysts expect a cut of at least 0.75 points either at or before the Fed’s next scheduled policy meeting on March 18.
The expectation of aggressive rate cuts is likely to undermine the dollar further. Sterling climbed back above the $2 level last week after the Bank of England left UK interest rates unchanged at 5.25%. The dollar’s slide pushed the price of oil to a new record of $106 a barrel on Friday and helped the gold price to nearly $1,000 an ounce.
Hank Paulson, the US Treasury secretary, said on a visit to California that the employment figures were bad but not surprising. “Clearly these jobs numbers that came out today are not welcome, and not good news,” he said. “This is a tough quarter - we know it.”
On Friday President George Bush sought to allay fears of recession. “I know Americans are concerned about our economy, so am I,” said Bush. “It’s clear our economy has slowed, but the good news is we anticipated this and took decisive action to bolster the economy. We recognised the problem early and provided the economy with a booster shot.”
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