Alan Greenspan’s discussion of recession may have been overtaken by events. Figures of US factory orders released on 6 March suggest the economy may have taken a further downward lurch.
The largest fall in factory orders since 2000 follows an already weak fourth-quarter.
An unheralded recession would not be unprecedented. The US economy contracted in the third quarter of 2000, but nobody noticed—recessionary speculation began only after November’s stock market decline.
In the Bureau of Economic Analysis’ “advance” estimate of October 2000, third-quarter gross domestic product (GDP) growth was put at 2.7%.
The figure was then revised steadily downwards over the next three years, falling below zero only in a final statistical revision in December 2003, more than three years later.
The US economy certainly appears to be decelerating. Productivity growth has been low for 15 months, and GDP growth was only 2% in the second half of 2006.
Non-residential capital spending has been much weaker than in previous cycles, in spite of very low interest rates, suggesting that the investment bubble of the late 1990s produced an “overhang” similar to, but less pronounced than, the investment dearth of the 1930s.
Tuesday’s weak factory orders figures and Monday’s weak Institute of Supply Management services index suggest the US output may now have stopped expanding.
That would normally lead the Federal Reserve to cut interest rates. The collapse of the low-quality housing loan sector, and the signs of mortgage defaults spreading would also suggest a rate cut to revive housing.
However fourth-quarter unit labour cost growth, revised hugely upwards to more than 6%, shows that inflationary pressures are still building, and are not confined to oil, commodities and agriculture.
A rate cut in such circumstances would be highly irresponsible. If it was sufficient to re-stimulate the economy, it would solidify inflationary expectations that might take a decade to remove.
Without a rate cut, the US economy will not revive quickly. We probably won’t know finally until about 2011, but on the strict definition of two consecutive declining quarters of GDP, the US economy may have entered recession.