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US recession won’t be shallow or short

US recession won’t be shallow or short
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First Published: Sun, Oct 19 2008. 11 48 PM IST

Updated: Sun, Oct 19 2008. 11 48 PM IST
The latest economic data confirm that the US is in a recession. Comparisons with previous downturns show that it could be among the worst in recent memory. Poor public policy could prolong and intensify the pain.
The 2.8% fall in US industrial production in September, the largest since 1974, was partly caused by hurricanes and the Boeing Co. strike. Nevertheless the 4.5% drop from last year’s figure is one clear sign of the economic contraction. Similarly, the 1.2% retail sales drop, following a smaller August decline, indicates a significant consumer demand shortfall.
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Combined, the two indicators counter misplaced optimism sparked by the robust 2.8% increase in second quarter gross domestic product. They also show downward economic momentum substantially greater than in 2001 or the early 1990s. Thus the recession will probably be deep, comparable with the 1974 recession and that of 1980-82.
It will also be prolonged. A new all-time low in the National Association of Homebuilders’ index in September demonstrates that the housing market decline is nowhere near flattening out. That will cause further credit problems, intensifying the already tight financial squeeze on consumer borrowing and spending.
Tough times: A ‘for sale’ sign in front of a vacant new home in the US. Jim R. Bounds / Bloomberg
Meanwhile, despite low reported month-on-month consumer inflation, that problem has not gone away. September’s consumer price index was up 4.9% from the previous year, the producer price index was up 8.7%. The budget deficit, already swelled by banking system bailouts and new spending plans, received another blow from inflation; the variant of the consumer price index used for indexing social security payments and tax allowances was up 5.8%, which will further burden government finances.
With substantial inflation and the budget deficit approaching $1 trillion (Rs48.7 trillion), both fiscal and monetary policies are under strain. Expenditures or tax rebates to fight the recession will worsen the deficit, as well as diverting scarce resources. Thus the government risks causing a double-dip recession, in which its expenditures abort the initial downturn but produce a further contraction as it is forced to tighten fiscal and monetary policies. Balancing policy responses to avoid this will be a major challenge for the next US administration.
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First Published: Sun, Oct 19 2008. 11 48 PM IST