Global recession has begun

Yesterday's bleak reports on the state of US and European manufacturing confirmed that a global recession has already begun.


The Institute of Supply Management (ISM)'s composite business activity indicator plunged for the second month to 38.9 - far below the 50-point threshold dividing expanding activity from a contraction, and the lowest level since September 1982. The 11-point plunge in the index over the last three months (Aug-Oct) has been equalled on only four occasions since 1945 (1949-50, 1959-60, 1974 and 1980-81).

It dispels any remaining doubt that the United States has already entered recession - which the National Bureau of Economic Research (NBER) defines as "a significant decline in economic activity, spread across the economy, lasting more than a few months".

The economy has been in troubled for more than a year. Manufacturing output peaked in Jul 2007 and had fallen 2.3 percent by Aug 2008 according to estimates published by the Federal Reserve. Private sector jobs peaked in Nov and were down 0.7 percent by Aug.

Repeat claims for unemployment insurance had risen almost 1 million over this period, and the number of people in desperate poverty receiving help under the federal government's Aid to Families with Dependent Children (food stamp) program surged almost 2.5 million.

But until the last two months, problems had been largely confined to the motor manufacturing and construction sectors. While production of cars and light trucks declined 28 percent between July 2007 and August 2008, output of other durable items intended to last at three years or more actually rose, albeit by a marginal 0.4 percent.

Nonfarm businesses eliminated 815,000 positions on a net basis between November 2007 and August 2008. But most job losses were recorded in construction (-360,000) and motor manufacturing (-105,000) with fairly modest losses spread across the rest of the manufacturing and service industries (-349,000).


THE DOWNTURN SPREADS

In the last two months, however, the downturn has widened to the rest of the economy as growing financial turmoil and a darkening outlook have caused households and businesses to prepare for a long and deep slump by retrenching.

Retail sales have fallen in each of the last three months (Jul-Sep). But the Census Bureau measures sales in cash terms rather than by volume, so the headline numbers tend to be distorted by changes in the price of gasoline, as well as financing programmes and deep discounting designed to shift auto inventories.

A better guide to the underlying strength of the consumer sector is "core sales" of items other than autos and gasoline. Core sales fell in both August and September, the largest cumulative decline since the immediate aftermath of the attacks on the World Trade Centre and Pentagon, the first consecutive monthly decline in more than a decade.

Core sales have risen on average just -0.12 percent in each of the last 12 months. Since even core inflation has been running faster than this, sales volumes have been flat or falling for a year. But the pace of decline has accelerated sharply in recent weeks.

Source: EconomicTimes