It's beginning to look like recession

The latest economic indicators show that the United States economy is moving very close towards a recession, if it is not already in one. The rest of the world economy, however, continues to expand.

On Friday, the US Labor Department reported that non-farm payrolls in the US rose by 18,000 in December, the weakest job growth since August 2003. Private-sector payrolls fell by 13,000, the first decline in more than four years. The household survey showed employment plunging by 436,000, the biggest decline in five years.

The employment report reinforced data earlier in the week indicating weak US economic growth. On Wednesday, the Institute for Supply Management reported that its manufacturing PMI had fallen to 47.7 in December from 50.8 in November, indicating that manufacturing activity in the US has shrunk. The non-manufacturing index released on the same day as the employment report showed a smaller drop to 53.9 in December from 54.1 in November.

Wider leading indicators have also been pointing to a slowdown in the US economy.

Last month, the Conference Board reported that the US leading index decreased 0.4 percent in November. From May to November, it had fallen 1.2 percent, the largest six-month decrease in the index in six years.

Last week, the Economic Cycle Research Institute reported that its Weekly Leading Index inched up to 135.1 in the week to 28 December from 135.0 in the prior week. However, the annualised growth rate fell from -5.2 percent to -6.2 percent, the lowest rate of growth since November 2001.

One major economic indicator that did rise recently provided absolutely no consolation whatsoever. The unemployment rate went up to 5.0 percent in December from 4.7 percent in November. It has now risen 0.6 percentage point from its bottom at 4.4 percent in late 2006 and early 2007. The US labour market does look as though it is beginning to break, a classic sign of a recession.

The employment report hit markets hard on Friday. Stock prices fell, the Standard & Poor's 500 falling 2.5 percent. Bond yields and oil prices also fell.

Investors obviously felt that the report significantly added to the probability that the US economy is falling into recession. Traders are now betting that the Federal Reserve will cut rates by at least 25 basis points and possibly 50 basis points at the Federal Open Market Committee meeting at the end of January. However, at the rate at which the economy is slowing, it is not at all clear that rate cuts at this point in time will be able to prevent a recession.

In the meantime, though, most other major economies have not shown the same degree of deceleration as that of the US. The latest purchasing managers' indices from the euro area, for example, showed that the manufacturing index slipped to 52.6 in December from 52.8 in November while the services index fell to 53.1 in December from 54.1 in November, but both indices remained above 50, indicating continued expansion. Japan's manufacturing PMI even improved, rising to 52.3 in December from 50.8 in November.

As a result, the JPMorgan Global All-Industry Output Index fell again in December to 53.5 from 54.0 in November but remained above 50. Indeed, all the major sub-indices remained above 50, indicating that global economic activity continued to expand in December.

		November	December
Output	Total	54.0	53.5
	Manufacturing	53.4	52.2
	Services	54.2	53.8
New orders	Total	52.5	52.6
	Manufacturing	53.3	51.4
	Services	52.3	53.0

To what degree the rest of the world follows the path of the weakening US economy could also depend on whether recent credit market turbulence persists.

Here, recent developments have been hopeful. There are some indications that credit markets are stabilising, with the Federal Reserve last week reporting some pick-up in the US asset-backed commercial paper market, money market rates falling and credit spreads backing off from the highs of December.

Nevertheless, more losses among banks from write-downs of asset values as a result of the credit market turmoil are still likely in the coming months. This, at a time of reintermediation of the banking system, could strain bank balance sheets and induce them to curtail lending.

Coming at a time when the US economy is already struggling to keep its head above water, that could yet prove fatal to the prospect of avoiding a recession.