Monday, May 21, 2012

Rising US recession risk poses the real threat to Europe

The US economy has slowed to stall speed. A few lonely forecasters fear that America has already fallen back into recession, replicating the terrible double-dip of 1937.

A few lonely forecasters fear America has already fallen back into recession.


The Philly Fed’s manufacturing index dropped suddenly to minus 5.8 in May. The US Conference Board’s index of leading indicators fell in April. Job creation has slipped from 250,000 a month to nearer 130,000 in March and April. The Economic Cycle Research Institute (ECRI) says post-War personal income growth in the US has never been this weak for three months in a row without triggering a recession. It has happened ten out of ten times. 

It is this fresh menace - combined with China’s failure to calibrate its heralded soft-landing - that poses the real danger to southern Europe’s arc of depression over the next year. Greece is just a poignant detail. America’s official data has not picked up any inflection point yet. We may be repeating the summer of 2008 when Washington mistakenly reported brisk growth and Fed rhetoric turned hawkish, setting off the Fannie/Freddie, Lehman, AIG disasters. We now know that the figures were wildly wrong. The economy was already in slump.

Fed chair Ben Bernanke is vigilant this time. Last week’s Fed minutes hinted at fresh stimulus if “the economic recovery lost momentum”. The Fed noted “sizeable risks” as $1 trillion (£633bn) of fiscal cuts kick in automatically at the end of the year.
Read full article here

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