Data Indicate No U.S. Recesssion-Yet
What this is indicating is that while the construction sector is in a recession, and the manufacturing sector on the verge of a recession, the service sector and the mining sector is still growing. This was confirmed by the sector specific details of the employment report which showed shrinking employment in construction and manufacturing and increasing employment in services and mining.
This indicates Nouriel Roubini's forecast for 0% growth in the fourth quarter is a bit too bearish. Growth will probably end up a lot lower than the 2.2% current third quarter estimates, but it will be a bit higher than zero. The main reason why growth have stayed above zero despite the housing bust is that lower energy prices have boosted consumer purchasing power (so much for the idea that price deflation is necessarily bad for the economy) enough to offset much of the negative impact of the housing bust. All of this is in line with my analysis from late October.
For 2007, the case is much stronger for Roubini's recession call. Oil prices have now started to stabilize and indeed recover somewhat from their lows (at least in dollars ) and will provide no further support for the economy henceforth. While the falling dollar should boost U.S. exports, the dollar fall have been too small in trade weighted terms and the export sector play a too small role in the economy to provide a significant boost to the overall economy.
Meanwhile, the housing bust should continue as construction spending is still way above the historical average and as housing equity continues to erode. Which brings ut to the latest flow of funds report. While the increase in household debt was actually somewhat lower than I had expected, this probably reflects that the sharp increase in bank ledning in the week between September 27 and October 4 was attributed to the fourth quarter, which means that the debt increase then will be much higher. Even so, household debt relative to disposable income rose during the third quarter to a record 130.4%, up from 129.4% in the previous quarter.
Meanwhile, housing equity fell to a record low of 53.6%.
This means that construction spending will continue to contract, while the room for further home equity withdrawals will be limited, which in turn will limit consumer spending.
The one thing remaining to support the U.S. economy is business investments. One of the factors determining it, corporate profits reached a new record high during the third quarter, something which creates a case for believing in continued boom in business investments. However, while corporate profits are an important factor for predicting business investments, it is not the only one. What matters to business decisions to invest is not current profits per se, but expected future profits from further investments. If companies expect future profits to fall, then the current high level of profits will only have a limited effect in increasing business investments.
The last factor, the high level of business profits and the support it is likely to give to business investments is the strongest argument against the bearish case and makes it impossible to declare a 2007 recession a certainty. But, as all other indicators support that case, its likelyhood is over 50%