Is the US already in recession?

The US could already be in recession, one Wall Street heavyweight says, fuelling concerns of a possible sharp decline in the global economy.

David Rosenberg, a senior economist with investment bank Merrill Lynch, said that recession in the US is a “present day reality” in a research note issued on Monday.

“Friday’s employment report confirmed our suspicions that the economy was transitioning into an official recession towards the end of last year,” Rosenberg said.

Fellow Wall Street giant Goldman Sachs has also jumped on the recession bandwagon, predicting that the US economy will shrink in the second and third quarters of 2008.

The reality of whether the US is already in recession – technically defined as two consecutive quarters of negative growth – will not be known until we have official GDP figures from the US in several months.

But in the meantime, a series of poor economic results in employment, the manufacturing and services sectors and the housing industry have led economists such as Rosenberg to conclude that the US economy probably contracted in the final quarter of 2007 and is doing so again in the current first quarter of 2008.

Markets will be closely watching economic data released in coming months in an attempt to find any further confirmation that the US economy is or soon will be in recession.

Katie Dean, a senior international economist with ANZ, says the current deterioration in market conditions reflects the fact that much of the psychological impact of a possible US recession is being absorbed right now.

“By the time the data confirming if the US is in a recession comes out it won’t have a big impact because people are really looking more closely at high frequency economic data on things like employment coming out all the time,” Dean says.

She says the markets remain very uncertain about how much more bad news there is to come, but, she says, there is still “plenty of downside risk” if it does eventuate.

The magnitude of the risk to the global economy of a US recession is emphasised in a United Nations report released yesterday. It says while it is likely that the global economy will continue to grow at over 2%, if the US’s sub-prime woes worsen it could “trigger a worldwide recession and a disorderly adjustment of global imbalances”.

For Australia, a key question remains just how much damage a slowing US economy will cause to China’s booming growth – and the demand for our commodities it generates.

While the UN argues a recession will hit commodities as demand for China’s exports diminishes, a new World Bank report suggests that Asian economies are now sufficiently de-coupled from the US that they will be able to escape serious economic damage.

“Despite weaker US import growth, continued robust spending by oil exporting countries and vibrant expansions in China and India are projected to keep developing country growth strong at 7% or more in 2008 and 2009,” the World Bank says.

The ANZ’s Dean says at the moment the signs are China should be able to ride out any sub-prime generated economic storm.

“The impact on the Chinese and Asian economies would be a lot smaller than it would have been 10 years ago and not enough to derail their overall economic momentum – it really is a domestic driven region at the moment,” Dean says.