August 30, 2011

News Analysis: Are We in a Recession?

Bill Gross, Wells Fargo point to contraction; latest confidence reading in lowest percentile since data collection

Investor reacting to falling stock prices. (Photo: AP) Investor reacting to falling stock prices. (Photo: AP)

Consumer confidence plunged to two-year lows in August, stoking predictions and outright declarations that the economy has slipped into recession.

The Conference Board announced Tuesday that its Consumer Confidence Index fell a steep 14.7 points to a low not seen since April 2009, when the United States was still officially in recession. The Conference Board’s Lynn Franco says a factor contributing to the sharp fall-off “may have been the debt ceiling discussions since the decline in confidence was well underway before the S&P downgrade.” She added that “employment conditions continue to suppress confidence."

Meanwhile, a similar index shows a parallel drop in consumer confidence in Florida, prompting the survey’s director to declare his state to be “in, or at least very near, a recession.”

And Wells Fargo economists have declared 12 states to be contracting, with one of them, Alabama, already in a recession. The other declining states named by Wells Fargo were Georgia, South Carolina, North Carolina, Virginia, Michigan, Nevada, Montana, Illinois, Indiana, Vermont and Alaska.

PIMCO bond manager Bill Gross is another prominent voice that sees recession at hand, telling The Financial Times on Monday that “the U.S. and developed economies are near the recessionary dividing point.”

Tuesday’s consumer confidence report comes a day after the Commerce Department reported a 0.8% gain in personal spending—the largest monthly gain in 19 months. While evidence of actual spending buoyed Monday’s stock market surge, the low consumer confidence reading tracks other negative reports such as the University of Michigan consumer sentiment index.

Analyst Doug Short writes in his blog that from the perspective of modern economic history, Tuesday's consumer confidence reading is alarmingly low: “On a percentile basis, the latest reading is at the 1st percentile of all the monthly readings since the start of this data series in June 1977 and at the zero percentile of all the non-recessionary months. Only six months in the entire history of this indicator, all during the Financial Crisis, have been lower than the August number.”

The Consumer Confidence Index reading of 44.5 is lower than the 53.9 average for the 2007-2009 recession, and that recession’s average reading was far lower than the 65.5 average for the next worst recession of 1981-1982, according to Short’s analysis.

Somewhat more encouraging news was the Conference Board’s Leading Economic Index for the Euro area, which inched up 0.3%—followed by news that Standard and Poor’s forecast on Tuesday that Europe would avoid a double-dip recession over the next 18 months.

Back home, U.S. stocks turned negative on Tuesday and gold rallied past $1,800 an ounce; the metal has often surged on bad economic news.

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