Is There a Recession?

We have not changed our outlook—the economy should avoid slipping into a broad-based recession for most, if not all, of 2008.

In fact, business conditions are likely to improve somewhat going through the next two to three quarters. Looking further out, we remain quite concerned about the economic prospects for 2009 and 2010, both here and abroad.

The growth rates for Nondefense Capital Goods New Orders have turned up. Both the quarterly and annualized comparisons are moving higher, with New Orders coming in above the year-ago level. This means the cyclical momentum is improving as we speak. These growth rates would be heading in the opposite direction if the economy were really sliding into a recessionary abyss.

You might argue that the reversal in momentum is a function of aircraft new orders being included in the data, but you would lose the argument. The Nondefense Capital Goods New Orders 3/12 (quarterly rate of growth) excluding aircraft is showing that new orders are 1.6 percent higher than at this time last year. The annualized rate of growth (12/12 rate-of-change) is also moving higher. The bottom line is that with or without aircraft, the trend status is improving and the data trend is heading up.

There is another piece of good news that is worth talking about—Retail Sales. Worries about the consumer and his or her ability to keep the economy going are justified. It will be hard to maintain growth with a rapid fall-off in consumer spending, and if this was truly what is happening, we would see steep month-over-month declines in January and February. The reality is just the opposite, in that Retail Sales posted milder than normal month-to-month declines in January and February. The fact that this is occurring despite higher energy costs, housing concerns and lethargic lending practices is a testament to the strength of the U.S. economy and the resilience of the American consumer. Want to help your country? Go buy something!

You may have been reading elsewhere from others, including from a world-renowned investor, that the economy is already in a recession. Given the scope of the economy, to make broad statements requires broad measures of activity. Looking at those, we are not in recession. Gross Domestic Product (GDP) is not going down and U.S. Industrial Production is also not going down. One or both of those would have to be contracting for there to be a recession; technically, they would need to be contracting for two consecutive quarters, and clearly, this is not currently the case. What we are experiencing is a slowdown going through the first quarter. The real recession is going to be a more difficult and broadly felt trend. We think it is going to begin in 2009 and extend well into 2010.

Overall, Metalworking Machinery New Orders is enjoying a positive trend with new orders tracking $29.8 billion, virtually even with the six-year high of a year ago. There is not a lot of overt growth going on, but the level of activity should be providing readers with business opportunities. Readers should plan on seeing a steady, moderate rate of growth in 2008, with Metalworking Machinery New Orders for 2008 coming in about 9.5 percent over 2007.
Production in the Metalworking Industry seems to be split. Fabricated Metals, Structural, Fastener & Bolts as well as Spring & Wire Production are all showing growth trends. Forging, Hardware and Bearing Production is contracting.

Alan Beaulieu, alan@ecotrends.org, is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H. He invites your comments.
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