There has been much talk that the US economy is heading back into recession. ‘Double-dip’, ‘deflation’ and ‘ice age’ are words that have been taken up in the financial press. Indeed, the UK’s Guardian newspaper reckons the world is about to ‘blow up’!
I remain unconvinced that the US is heading into recession in the next 12 months. In previous posts, I have argued that the best measure of the health of a capitalist economy is profit, both its overall level and its rate relative to the stock of capital held in the economy (see Profits lead the way, 28 April, 2011). In this measure, the US economy has clearly recovered from the Great Recession of 2008-9, which ended (on this measure) in mid-2009 (see my more considered post, Is America recovering?, 7 February 2011). But this profits recovery has not been translated into a significant rise in investment by capitalist corporations yet and, as a result, the US unemployment rate remains very high and the net increase in employment is very weak. Also, it appears that the growth in overall profits is beginning to slow. That would suggest that soon the rate of profit will peak and start to turn down, signalling the likelihood of another slump down the road.
But not yet – my view has been that the process of deleveraging after the Great Recession has reduced the ability and willingness of the capitalist sector to increase investment and employment (see my post, Deleveraging and the economic recovery, 7 July 2011). So economic growth in the major capitalist economies is likely to be much weaker than in previous recoveries. But that does not mean these economies will slip into a new recession right now.
Are there other more ‘high frequency’ ways on top of profits, investment and employment that can tell us whether the US economy is dropping back into recession? One possible shorter-term way of telling whether the US economy is heading into recession right now is to look at surveys of business activity in the US. Surveys are not great measures of an economy because they are just that – surveys. But combined with other data, like profits, investment and employment, they can be useful more up-to-date guides as to where an economy is placed. The best survey of business activity for the US economy is provided by the Institute of Supply Management (ISM). The ISM survey covers both manufacturing and services companies on a monthly basis. It computes the number of companies that consider their businesses are growing against the ones that don’t. If the ISM score is above 50, there is growth in the sector; if it is below 50, there is contraction in the sector.
What does the ISM survey for US manufacturing show? Currently, the ISM index is above 50, which suggests there is still growth. But there has been a significant slowdown from a peak of over 60 just some four months ago. That suggests a very sharp turnaround from boom heading towards slump. Well maybe. It clearly shows why many economists reckon the US economy has entered a ‘soft patch’. However, as the graph below shows, it is not unusual for the ISM manufacturing index to be in the range of 50-55 without falling into recession.
Maybe a better measure is the rate of change in business activity. I’ve adjusted the ISM manufacturing index to look at its rate of change. As the graph below shows, on that measure, US manufacturing is not yet in recession mode.
But manufacturing is only 20% of business activity in the US capitalist economy. Most businesses provide various services: retailing, professional services, finance, marketing, trading etc. The ISM non-manufacturing survey covers this part of the capitalist economy. So I have combined the two surveys on manufacturing and non-manufacturing into one measure. Again, this shows that the US economy is not yet in recession.
And when the rate of change in the combined ISM is measured, it shows that the US economy is now pretty much in the same range as it was in the period of recovery after the previous recession of 2001.
We can look ahead by measuring the ISM survey on new orders that manufacturers and services companies are getting. This is a good leading indicator of the way the economy is heading. My measure of combined new orders for manufacturers and non-manufacturers shows that there is a slowing in the growth of new orders, but there is still growth. It is not indicating recession quite yet.
Finally, the rate of change of the index for combined new orders shows that the US corporations can still broadly expect some growth in sales that are commensurate with low growth in the economy, but not a recession.
A lot of measures and lot of graphs based on surveys of business. But combining these results with the current data on profits, investment and employment suggests a ‘double-dip’ recession is not imminent. But watch this space.
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