Second quarter US gross domestic product (GDP) rose 1.9%, largely thanks to tax rebate cheques sent out as part of the Bush administration’s economic stimulus package. Exports and government spending were growth areas. But weak personal finances and sub-par economic growth suggest further credit problems ahead. An official US recession may only be delayed.
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The US economy’s trajectory is difficult to divine, and quarterly GDP figures don’t help. In 2001, recessionary quarters appeared and disappeared as revisions were made to estimates, before it was finally determined that no recession occurred by the official definition of two consecutive down quarters. The annual revisions in 2005-07 GDP figures this month have changed the overall trajectory only modestly downwards, but a 2006 “statistical discrepancy” of 1.2% of GDP ($163 billion, or Rs6.9 trillion today, in real money) suggests there is still considerable uncertainty. Between mid-2006 and mid-2008, as per this month’s figures, three quarters of subpar growth averaging 0.8%—recessionary in practice, given 1% US population growth—were followed by two quarters of enthusiastic 4.8% growth, which have now been followed by another three averaging 0.8%. During the two quarters of strong expansion in mid-2007, the largest credit crisis in decades exploded. Certainly, nobody noticed strong growth at the time. It is thus questionable what exactly quarterly GDP figures really mean.
Still, this time there appear to be some negative indicators. The government’s stimulus package, mostly implemented in May and June, added about $130 billion to personal income, representing 4.2% of its nominal 7.4% rise—without this, income would have risen less than inflation. Personal savings rose only $60 billion in the quarter, so less than half the package remained at 30 June to stimulate subsequent consumption. That suggests that the financial squeeze on consumers, alleviated during the second quarter, could worsen in the rest of 2008.
With the consumer under strain, house prices continuing their decline and GDP growing at best sluggishly, debt problems are likely to increase in both the consumer and high-yield corporate sectors. That suggests a continued likelihood of recession, even by the official definition, in the months ahead—but it could be 2010, or later before we know it.