Monday, 10 November 2008

It's a recession -- and it's global

After more than a year of uncertainty over whether the developing economic slowdown in the United States would turn into an outright recession and drag the rest of the world economy down with it, the situation has largely cleared up. Unfortunately, it looks like an affirmative to both.

On 7 November, the US Labor Department reported that employment in the US fell by 240,000 in October. Job losses over the last 3 months totalled 651,000. The unemployment rate rose from 6.1 percent in September to 6.5 percent in October.

Earlier in the week, the Institute for Supply Management reported that its manufacturing PMI fell from 43.5 in September to 38.9 in October. The ISM also said that based on past patterns, the PMI reading for October corresponds to a 0.7 percent annualised rate of decrease in real GDP.

The latest data practically confirm that the US economy is in recession. The rate of contraction in employment and the level of the PMI seen currently have only been seen in the past half a century or so during recessions.

And it is not just the US economy facing recession; it looks like the recession will be global. The purchasing managers' indices for the manufacturing sectors of other major economies were also below 50 in October.

National manufacturing PMIs
 SeptemberOctoberChange
US43.538.9-
Eurozone45.041.1-
Japan44.342.2-
UK41.241.5+
China47.745.2-

The acceleration in the rate of contraction in global manufacturing brought the JPMorgan global manufacturing PMI down from 44.7 in September to 41.0 in October, the lowest reading since data were first compiled in January 1998.

The service sectors in the leading economies also contracted in October. In the US, the ISM's non-manufacturing index fell from 50.2 in September to 44.4 in October. In the euro area, the Markit eurozone purchasing managers' index for the service sector fell from 48.4 in September to 45.8 in October. In the UK, the Chartered Institute of Purchasing and Supply's service sector index fell from 46.0 in September to 42.4 in October.

The JPMorgan global services business activity index fell from 50.2 in September to 44.2 in October, its second-lowest reading since data were first compiled in July 1998.

The JPMorgan global all-industry output index fell to 43.1 in October. Other all-industry indices also fell in the month.

JPMorgan global all-industry indices
 SeptemberOctoberChange
Output48.643.1-
New Orders47.541.6-
Input Prices65.153.5-
Employment45.943.6-

On 7 November, the Organisation for Economic Co-operation and Development released its composite leading indicators for September which told the same story: continued weakening of the major economies.

Indeed, the latest economic forecasts released by the International Monetary Fund on 6 November see advanced economies slowing from a combined 2.6 percent growth rate in 2007 to 1.4 percent in 2008 and then shrinking by 0.3 percent in 2009.

Projected growth rates in percent by IMF
 20082009
United States1.4-0.7
Euro area1.2-0.5
Japan0.5-0.2
United Kingdom0.8-1.3

The current financial market turmoil may have its origins in the US but the recession that is developing is looking like it will be a global one.

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