The U.S. Economy Is Flashing Recession

Payrolls, stock indexes, and GDP growth point to another contraction

The U.S. may again be on the cusp of a recession. Stagnant payrolls in August added to recent data showing that manufacturing is slowing, consumer confidence is sliding, home values are falling, and bond prices are rising as investors shun stocks for the relative safety of fixed-income securities. “At this stage of the typical expansion we expect above-average growth and instead we are barely seeing any growth at all,” says James Hamilton, an economics professor at the University of California at San Diego who has advised Federal Reserve banks and studied what tips the U.S. into downturns. “We have to be worried.”

September could mark the start of the slump, says Julia Coronado, chief economist for North America at BNP Paribas in New York, who predicts the economy will shrink at a 2 percent annual rate in the fourth quarter. “When there are no jobs and no income, there will not be a lot of spending either,” she says.

Monthly gross domestic product almost hit a three-year peak in April, then declined the following two months, according to St. Louis-based Macroeconomic Advisers. The National Bureau of Economic Research uses this data in dating recessions. Jeffrey Frankel, a Harvard University professor, sits on the NBER committee that determines when recessions begin and end. While he doesn’t expect to make an official recession call, he says, “This is a long slump we’re in. In that sense it’s like the 1870s or 1930s. You have a recovery but not enough to create jobs or get the economy going.”

The disappointing job numbers released on Sept. 2 make it more likely that Federal Reserve Chairman Ben S. Bernanke and his colleagues will take new steps to protect the recovery when they meet on Sept. 20 and 21. One possible move: replacing short-term Treasury securities in the Fed’s $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, according to economists at Wells Fargo and Goldman Sachs. At least two Fed presidents have said in recent days that signs of a recession could prompt more easing. The Standard & Poor’s 500-stock index dropped 17 percent from July 22 to Aug. 8. Declines of that size in the S&P 500 have occurred just twice without signaling a recession, in 1987 and 2002, according to figures going back to at least 1970 from ISI Group.

The Bloomberg Consumer Comfort Index has been stuck below –40, the level associated with recessions or their aftermath, since the end of February. “I had been saying for three months we wouldn’t have a double dip, but I am losing that discussion,” says Tony Raimondo, chairman of Behlen Manufacturing, a 900-employee company that makes agricultural equipment and commercial buildings in Columbus, Neb. “All the data, the momentum, the emotions say the country isin the doldrums.”

Gross domestic product, adjusted for inflation, cooled to a 1.5 percent growth rate in the second quarter from a year earlier. About 70 percent of the time when GDP growth pace has fallen below 2 percent, a slump has followed within a year, according to an April study by Jeremy J. Nalewaik, a Fed board staff economist.

Some economists aren’t ready to conclude that a recession is inevitable. For one, the August payroll figure was pulled down by a strike at Verizon Communications involving about 45,000 workers. Also, while business and consumer confidence surveys point to recession, most “hard data” including sales and production numbers continue to expand, says Michael Gapen, senior U.S. economist at Barclays Capital. “Downside risks are certainly elevated,” he says. “But things like higher uncertainty alone historically are not something that send the U.S. economy into recession.”

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