The strangest and mildest US recession on record

Was there a recession? Revised data issued by the US Department of Commerce suggest that the assumption that the US economy has been in recession since mid-2001 was mistaken, or at least that it was one of the mildest, and strangest, recessions on record.

Certainly the mood on Wall Street has been transformed by recent economic statistics showing renewed growth in many sectors of the world's biggest economy, and the Dow Jones yesterday registered one of its biggest one-day gains for the year.

The latest figures yesterday underlined the new buoyancy in manufacturing, with factories driving up production in February for the first time since July 2000 to meet a surge of new orders and renew inventories.

On Thursday the Commerce Department said it had revised upwards its estimate of annualised growth for the fourth quarter of last year from 0.2 per cent to 1.4 per cent, due to strong consumer spending on discounted cars and low interest rate house purchases.

This means that the US economy actually registered 0.1 per cent growth since early last year, when the the National Bureau of Economic Research (NBER), the official recession monitor, said the economy went into recession. Using complex data, the NBER also officially decides when a recession is over - and now faces the embarrassment of having to admit that it never really got under way.

The most common rule of thumb for defining recessions is the occurrence of two quarters of negative growth, which has happened in every recession in the last half century. This is now not going to come about if present trends continue. Gross domestic product has contracted in only one quarter and all the indicators are that growth is stronger.

Federal Reserve watchers noted that in his assessment of the economy on Wednesday, Federal chairman Mr Alan Greenspan did not use the word recession once, referring instead to a "downturn", a "slowdown", a "contraction" and a "period of considerable strain".

Consumer spending has apparently kept the economy in positive territory at a time of major shocks, which brought about the loss of 1.5 million jobs in the last year, huge losses in stock prices and plunging corporate profits.

Consumers, who drive two-thirds of the economy, increased spending by 6 per cent in the last quarter of 2001. Spending made further strong gains in January with a surge also in construction, helped by freak mild weather.

Wall Street chose to ignore a closely watched consumer sentiment gauge that showed an unexpected drop in February, at a time when it was becoming clear that recovery would be mild. The Nasdaq also recovered recent losses yesterday with a rebound in semiconductor stocks after an upbeat business report by Novellus Systems, a major producer of chip-making equipment.

Novellus chairman and CEO Mr Richard Hill told investors in a conference call: "There are signs of the downturn going away, we see that February has followed January with continued signs of recovery." Intel shares also rallied strongly.

The Commerce Department reported that personal income rose 0.4 per cent in January, while spending rose by a similar amount. Economists predicted personal income rose 0.1 per cent in January. The Institute of Supply Management reported yesterday that its manufacturing activity index rose to a bigger-than-expected 54.7 in February from 49.9 in January, indicating expanding factory activity after 18 months of decline.