America faces phased return to work as recession ends

Published on Saturday 5 December 2009 13:12

SO, America's recession is over. The Bureau of Economic Statistics, the nation's bean counters, reported last month that output in the third quarter grew at an annual rate of close to 3 per cent.

But like LP Hartley's past, the US is a foreign country and they do things differently there. Most nations abide by the simple, arbitrary convention that recession has struck when output falls in successive quarters and is over when growth resumes. In the Home of the Brave, the decision lies with a committee – eight economists, all men, who I can only assume wear grey suits.

The Business Cycle Dating Committee (BCDC) of the National Bureau of Economic Research does what its name suggests: it determines when the peaks and troughs of the economic cycle have occurred, including when recessions began and ended. For all that this arrangement might seem quaint, the committee takes into account a richer range of factors in reaching its decisions than the output numbers alone. The UK will emerge from recession, on our definition, with unemployment still increasing. Yet the BCDC gives weight to conditions in the job market and still has not declared America's slump over despite the fact that output is rising.

Nor does the committee rush to judgment. It announced in December 2008 that the current US downturn had begun a full 12 months earlier. Anywhere between six and 18 months can elapse before the committee declares a turning point had occurred. The committee speaks only when it is certain. All of this means that the US recovery will have been under way for some time before the committee consigns this recession to history.

Most of the recent data is consistent with a growing economy. House prices are rising, even if a double dip remains possible. Consumer confidence is recovering. Business sentiment is at levels consistent with rising output. Many indicators remain far from "normal" levels, but a long bend is being turned, if not a sharp corner.

Three factors have spurred the recovery.

One reason for the collapse in output at the turn of the year was that companies liquidated stocks at a record rate. That fire sale has been followed by a rebuilding of inventories, leading to rising manufacturing orders and stabilised production.

It has been abetted by a massive injection of fiscal and monetary policy steroids. The "cash for clunkers" programme gave people incentives to trade-in old cars for new and is estimated to have resulted in around 625,000 extra sales, boosting demand by more than 10 per cent. It is reckoned tax credits for first-time home buyers will add 400,000 sales this year to a housing market averaging fewer than 500,000 sales per month. The Federal Reserve's main interest rate is close to zero and it has introduced its equivalents of quantitative easing.

These boosts have been augmented by a recovery in exports as the world economy returns to growth.

All of this is a welcome alternative to the dark days of the first quarter, but three clouds loom overhead.

First, the job market remains grim. In October, the unemployment rate breached 10 per cent for the first time since 1983 – in the UK we are still below 8 per cent – with six people chasing every job vacancy compared with less than two in 2007.

Secondly, like us, American households have a pile of debt to repay. They have set about the task with gusto. Since the end of the Second World War, there have been 67 months in which Americans have repaid debt. Twelve of them have been in the past year. July was the biggest hair-shirt month on record, with $21billion of debt repaid. On its own, that would have been enough to cut the growth of consumers' spending on the month by more than 0.5 per cent. Over the third quarter as a whole, more than $40bn was returned to lenders.

Thirdly, the government is in a quandary as to whether it can act as the consumer of last resort over the medium-term. According to the Congressional Budget Office, public debt will double from more than $7trillion this year to more than $14trn ten years from now. Already, President Obama has made clear that rebuilding the public finances is a looming priority. But others, such as Nobel laureate Paul Krugman, argue passionately that deficit reduction should become the administration's focus only once it is certain that a long and deep recession has truly been averted and unemployment is returning to more acceptable levels.

The US has usually come out of postwar recessions like an Olympic sprinter. On average, its economy has grown by more than 3.5 per cent in the year following a slump. By comparison, the UK has struggled to reach 2 per cent. The caricature holds that this is because, when markets get out of kilter, Americans tend to try to get them back on an even keel as quickly as possible without the same regard for the consequences in terms of unemployment and social distress that we and other Europeans might share. They seem to have taken the same actions again this time with the swift and substantial fall in house prices and their approach to tackling personal debt.

Only the foolhardy would dismiss their chances of repeating the trick again and emerging strongly from this downturn. However, as with so much over the past two years, this time could be different. The reality and fear of unemployment will put continued downward pressure on wages. That, combined with the need and the determination to reduce debt, is a drag on consumption growth. With government uncertain of its ability to secure political support for an extended support operation, it cannot be relied on as an alternative source of demand.

Export growth is welcome but foreign consumers are bit players in the US national accounts. In this environment, the incentives for businesses to invest will remain weak.

Recovery is under way. At this stage it relies on a strong rebound from the depths of last winter and substantial policy intervention. Once these factors depart the scene, the US is likely to be left with a recovery that is longer and slower than they have been accustomed to. This is going to be a middle-distance race, not a sprint.

Stephen Boyle is head of group economics at Royal Bank of Scotland