Signs of a US recession are still inconclusive

Posted on : Fri, 02 Sept 2011

Some economic indicators are suggesting that the US may be nearing a recession, or have already entered one. This has contributed to falls in stockmarkets. However, the signs of recession are still inconclusive, according to QNB Capital.

A recession is a period of at least two quarters of GDP contraction which usually involves job losses, reduced corporate profits and lower government revenue. However, there can be a lag of six months before accurate US GDP figures are available and substantiate a potential recession with evidence. Therefore, a range of leading indicators are used to provide an early warning system that a recession may have started, or be imminent.

One early indicator is the monthly Business Outlook Survey for the region south of New York that includes Philadelphia, Delaware and New Jersey. In July, this indicator had recorded a reading of 3.2, meaning that slightly more businesses were optimistic than were pessimistic.

However, the August reading of this indicator. unexpectedly plummeted to -30.7, meaning that a sizable majority of companies surveyed now expect deteriorating business conditions. This shocked markets, because previous negative readings of this strength have all been correlated with recessions since the 1970s.

 Political wrangling over the US debt ceiling, rather than actual business conditions, might have been the main cause for the fall in confidence. In which case, the indicator may not signal a recession.

Major stockmarket declines themselves, such as the one seen in recent weeks, have usually happened during recessions. This however is not a reliable indicator. Sharper selloffs happened in 1987 and 2003 during periods of economic expansion.
Some other important indicators related to jobs and consumer confidence are not yet clearly pointing towards a recession. So overall, the picture is still inconclusive.

If key upcoming data releases deliver negative results, fears of a recession are expected to grow, according to QNB Capital. The Institute of Supply Management’s index of confidence among manufacturers, due out on September 1st, will therefore be of particular importance as an indicator of a potential recession.

The index has fallen in recent months, although the July reading was still slightly above the neutral point of 50. If it were to fall lower, particularly below 45, it would be a strong signal of a recession. Even if it gives a positive reading, recession fears are likely to continue for a few months until the picture becomes clearer. Markets will remain jittery.