Fall in US industrial production raises recession probability

While employment in the US has been declining, leading many economists to declare that the economy has tipped into recession, industrial production had been one of those indicators that had merely stagnated but not shown a clear decline. This changed in April.

On 15 May, the Federal Reserve released data showing that industrial production fell 0.7 percent in April. Industrial output in April was also the lowest since May last year. The decline in industrial production raises the probability of a US recession.

The fall in industrial production was not surprising. The Institute for Supply Management's manufacturing PMI has been below the 50 mark for the past few months.

Retail sales is the other indicator that has been weak for some time and the latest report proved no exception. On 13 May, the Commerce Department reported that retail sales fell another 0.2 percent in April.

Elsewhere in the world, though, economies have been somewhat more resilient.

On 15 May, Eurostat reported that gross domestic product in the euro area grew by 0.7 percent in the first quarter, accelerating from 0.4 percent growth in the fourth quarter of 2007.

On 16 May, Japan's Cabinet Office reported that the economy grew 0.8 percent in the first quarter, also accelerating from the downwardly-revised fourth-quarter growth of 0.6 percent.

However, the composite leading indicators released by the Organisation for Economic Co-operation and Development last week showed that the major economies remain headed for a slowdown.

A consolation for the global economy perhaps is that the expected slowdown is likely to cool inflation around the world.

There are already signs that inflation has peaked in the US. Last week, the Labor Department reported that headline CPI in the US increased 0.2 percent in April, less than the 0.3 percent gain in March. Consumer prices excluding food and energy climbed 0.1 percent, down from a 0.2 percent gain a month earlier.

The declines helped bring the 12-month rate of increase in headline CPI to 3.9 percent in April, slightly down from 4.0 percent in the previous two months. Excluding food and energy, the index was 2.3 percent higher than a year ago, down from 2.4 percent in March although only back to the rate in February.

In the euro area, Eurostat last week confirmed consumer price inflation at 3.3 percent in April, down from 3.6 percent in March.

However, other data released last week show that inflation is still accelerating in many parts of the world.

In China, consumer price inflation rose from an annual rate of 8.3 percent in March to 8.5 percent in April, inducing the People's Bank of China to increase the reserve requirement ratio for commercial banks by half a percentage point to 16.5 percent.

In the UK, the inflation rate rose from 2.5 percent in March to 3.0 percent April. The Bank of England's latest inflation forecast is that it is likely to stay above 3 percent for several quarters.

Moderation in global inflation, especially towards the respective central banks' target or comfort ranges, will probably have to wait until after the slowdown becomes more evident globally.

With yet another US economic indicator moving into recession territory last month though, clear evidence of such a global slowdown may not take too long to come.