US recession risk


A slowing manufacturing sector, weak housing market, and skittish consumers are pushing up the risk of a US recession, but are what is needed to cut inflation in the world’s largest economy. The latest warning bell rang when data from the US Institute of Supply Management showed November US manufacturing activity contracted for the first time in three-and-a-half years.

Earlier this week government data showed orders for manufactured durable goods posted their sharpest fall in six years in October. That report also showed orders for capital goods, excluding aircraft and defense orders, fell 5.1% which is troubling for an economy that needs business spending to keep growing while consumers catch their breath.

The housing recession is now becoming a construction recession, an auto recession, a manufacturing recession, an investment recession and, soon enough, a retail and consumption recession. Professor of economics at the New York University’s school of Business expects a full-fledged recession by early 2007.

Some weakness in manufacturing off a growth in inventories as seen in the third quarter gross domestic product earlier this week, but a slowdown in factory activity could combine with a weak holiday shopping season to slow the economy more than desired

A healthy climate is needed for capital business spending to keep U.S out of trouble. The government bumped up its estimate for third-quarter economic growth on strong business investment, though the housing sector posted its biggest drop in more than 15 years.

Still, the economy grew at a 2.2% annual clip and the latest data paint an even weaker picture for the fourth quarter. It also appears that some special factors are going on, like the manufacturing downturn, which now appears to be a little bit sleeper than what was expected earlier by economists.

Odds of a recession were put at 24.8% by forecasters surveyed by the Blue Chip Economic Indicators newsletter but economists say the odds have risen further as a string of weaker-than-expected data rolled in.

Many analysts still believe the economy is poised for a soft landing, or a slowdown in growth that eases inflation enough to keep the economy on an even keel while avoiding recession Such a scenario is exactly what Federal Reserve policy makers aimed for with a more than two year string of interest rate increases that ended in June.

Many forecasters expect the economy to advance around a 2% annual rate for the next few quarters, gaining speed only slightly in the second half of 2007. One director of an investing company predicts that U.S is moving toward a softer growth trend, but it’s not soft enough yet to argue that a recession is in the forefront.

After pushing the federal funds benchmark interest rate up to 5.25% with a 17th straight rate rise in June Fed officials have left rates unchanged at the past three policy meetings and are expected to do so in the next meeting. The U.S economists consider that they may continue to be in the mid-stages of an extended economic soft patch.

While many financial market players now expect the central bank to cut interest rates by March, Fed chairman and other officials are still warning that inflation remains a concern.