July 29, 2008

House prices falling...
Financial markets struggling...
...but US economy is growing?

Is the US in recession? Tough call as GDP grows amid financial turmoil

NEW YORK - COULD this be the first US recession without a decline in economic output?

While house prices in America are tumbling, job losses growing and financial markets struggling with their worst shock in decades, the economy is expanding.

The Wall Street Journal in a report yesterday said economists are weighing the possibility of a United States in recession while enjoying economic growth.

The US economy is likely to show a growth rate of more than 2 per cent when the government gives its first estimate of the second-quarter performance on Thursday.

The country's gross domestic product (GDP) - its total output of goods and services - expanded at a 1 per cent pace in the first three months of this year, thanks to a rise in exports because of the falling US dollar.

This means a recession under the most common definition - two straight quarters of declining GDP - did not occur in the first half of this year.

But the non-profit National Bureau of Economic Research (NBER), which decides whether the US has slipped into a recession, uses a different gauge. It looks for 'a significant decline in economic activity spread across the economy, lasting more than a few months'.

Those gauges include GDP, incomes, employment, industrial output and retail and manufacturing sales, says the NBER's seven-member Business Cycle Dating Committee, which is composed mostly of economists from academic institutions.

The panel can declare a recession, even if GDP remains positive, based on other measures, said the Journal.

Most of those gauges have been especially weak in recent months and some are in outright decline, it said.

The job market, for instance, has been contracting all year and the government is expected to report on Friday that payrolls dropped this month, the seventh consecutive monthly decline.

Harvard University's Professor Martin Feldstein, president of the NBER until this month, told the Journal the US has been 'sliding into a recession' since January, when many monthly statistics peaked.

But a GDP decline is not necessary 'if there is enough other evidence that the economy is contracting', he said.

Whatever the case, the NBER committee will not be making the call any time soon. The 2001 recession went from March to November of that year, but the committee did not declare the start of the slump until November 2001 and did not call the end until 2003.

'We take our time,' Stanford University economist Robert Hall, chairman of the committee, told the Journal. 'We like to get things right.'