US edges closer to recession

"THE RECESSION bell just rang louder," said Jonathan Basile, an economist at Credit Suisse, after the US government yesterday said the economy contracted at an annualised rate of 0.3 per cent in the third quarter.

Although the headline figure was slightly better than the 0.5 per cent decline forecast by economists, the data nonetheless painted a gloomy picture of the state of the US economy, offering scant signs of a quick rebound.

The most glaring development between the second and third quarter was a sharp retrenchment by US consumers, whose spending accounts for about 70 per cent of economic output. After increasing at an annualised rate of 1.2 per cent in the second quarter, consumption dropped by 3.1 per cent in the third quarter. The period in question ended in September, so it does not even include the full effect of the deeper­crisis.

Business output also suffered, with non-residential fixed investment falling at a 1 per cent rate in the third quarter, compared to a previous increase of 2.5 per cent.

The fall in residential fixed investment, which is tied to the housing market, accelerated to 19.1 per cent from 13.3 per cent.

Helping the economy avoid complete freefall in the third quarter was a big jump in government spending and continued support from international trade. Defence spending surged at an annualised 18.1 per cent. Real exports of goods and services increased, and real imports declined, offering the latest positive contribution - of 1.1 percentage points - to economic activity from trade.

But the pace of export growth and import declines has recently slowed on the back of weaker overseas demand and the stronger dollar. "It has become less of a slam dunk than it was six months ago," said Goldman Sachs economist Jan Hatzius. But he suggested that if US demand for imported goods also suffered, trade's contribution to gross domestic product could remain positive.

One source of support is the impact of lower commodity prices, which frees up household and business spending power.

But there is concern that a jump in job losses could push the unemployment rate above 7.5 per cent by the middle of next year - potentially exceeding the peaks of the 2001 and 1991 recessions.

Economists remain uncertain as to how severe and protracted the likely recession will be.

Optimists believe aggressive moves by the US Federal Reserve and the Treasury to jumpstart the credit markets will have more effect in coming months.