Recession at US' doorstep

PETALING JAYA: The unexpected softer retail sales in December, when Americans are usually on a shopping spree for the year-end festive season, seems to confirm that the recession has arrived on US shores.

The retail sales figures, together with a string of economic data that point to a slowdown in economic activities, have raised pessimism that the world's biggest economy will not be able to avoid a recession.

Adding to the gloom is news that banking giants Citigroup Inc and Merrill Lynch were undercapitalised and were seeking fresh capital.

Citigroup slashed its quarterly dividend by 41% to shore up a capital base that has been eroded by losses from the subprime loan crisis.

Merrill Lynch, a big victim of the credit crunch caused by the defaults in subprime loans, said the view of the US slipping into recession was no longer a forecast but a "present day reality".

The US economy expanded 4.9% in the third quarter last year but there are growing concerns of a sharp slowdown or contraction in the fourth quarter, or early this year.

An economy is defined to be in recession when it has two consecutive quarters, or longer, of contractions.

Standard Chartered Bank is the latest among the big names that have warned of a recession in the US.

"The US economy, in our view, is heading for a recession," the bank's chief economist Gerard Lyons said.

Unlike the previous recessions that lasted 10 to 11 months, Lyons expects the US to stay weak until next year.

According to the US Department of Labor, the unemployment rate rose to 5% in December - the highest level since the fourth quarter of 2005.

The increase in last year's retail sales decelerated to 4.2% versus 5.9% in 2006. It was the lowest since 2002, when it grew at 2.4%.

The rising jobless rate would prompt Americans to tighten their belts and spend less, which is not good for the US economy, whose growth has hinged on consumer spending and the property boom over the past four years or so.

Goldman Sachs' forecast said the jump in the jobless rate in December increased the likelihood of an economic contraction and that the longest consumer spending expansion on record would end this year.

The downturn would last two or three quarters and be "relatively mild by historical standards," its chief US economist Jan Hatzius said in a report.

Goldman Sachs has forecast growth of 0.8% for the US economy this year, matching the increase during the last recession in 2001.

Some disagree with the pessimistic view on the US economy, where consumer demand has not shrunk since World War II.

Furthermore, US policy makers hold the trump card - they can cut interest rates to revive the economy.

Morgan Stanley economist Richard Berner said the peaking inflation should give the US Federal Reserve (Fed) latitude to ease monetary policy further.

Market consensus is that the Fed would reduce interest rates by at least 50 basis points to 3%, or even lower, from 4.25% currently.

Capital Dynamics Asset Management managing director Tan Teng Boo said the fall in retail sales in just the months of November and December was not sufficient to be regarded as a signal that the US is going into recession.

"We need to look at the economic data that track longer periods before drawing the conclusion of a US recession," he said.

Tan, who invests in equities globally, said certain statistics actually showed that the US economy was still resilient although growth would not be strong, citing the steady initial claims for unemployment insurance.

"That figure has been stuck at the bottom for the last one year. It is not dipping and it is not going up either.

"This at least suggests that the unemployment situation in the US is not worsening," Tan said.

He added that although the retailers had experienced slower sales, not all companies on Wall Street were that badly hit by the economic slowdown.

"Companies like IBM and Tiffany, which have exposure to other parts of the world, are doing well.

"Look at Boeing, which has problems coping with new orders," he added.

Tan said besides the corporate earnings from abroad, the global commodity boom would also benefit the US, which had a broad-based economy.

URL: http://biz.thestar.com.my/news/story.asp?f...04&sec=business