Industry Health Statistics
The recession started officially in the fourth quarter of 2007; GDP turned negative for the first time in the first quarter of 2008. While the bursting of the real-estate bubble was the primary cause of the recession, the crisis moved rapidly to the manufacturing sector which has been contracting since early in 2008; the services sector joined the contraction in the second half of 2008. The crisis in the industrial sector became significantly more pronounced after the financial sector came close to implosion in September 2008, and as the consumer placed a brake on spending. Unlike the previous recession, industry with the exception of banking/finance, real-estate and the automobile sector was generally in good health: a strong capital base, low inventories due to better supply chain management and relatively lean payrolls. Given those factors and the rapid disposal of inventory in 4Q08 and the first half of 2009, once consumers spending stabilized and thanks in good part to the government's liquidity infusion through both fiscal and monetary stimulus, the economy emerged from the recession in the third quarter of 2009. The fourth quarter of 2009 saw very strong GDP growth of 5.0%; unfortunately, the strength in the number was primarily due to a replenishment of inventories - while "normal" after a steep recession, replenishment of inventories by themselves do not result in sustainable growth, only a return of business and consumer demand can cause that. The latter looks to be severely compromised by a steep increase in the unemployment rate, now sitting around 9.6%, and by a process of consumer de-leveraging - after the severe loss of wealth resulting from the collapse of the real-estate market and the strong drop in the stock market, consumers, which were highly indebted to begin with have started a process of saving more and reducing their liabilities.
GDP Growth
While for the entire 2008 the US saw a flat GDP reading, 0.0%, 2009 was a different story. The US economy suffered a steep contraction of 2.6%, a yearly level not seen since the 10.9% contraction of 1946.
The very weak economy coming into 2008 became dreadful in the third quarter of that year, and the malaise continue during the first half of 2009. The financial crises on businesses, but specially on individuals which curtailed spending at a global level caused a sharp contraction in spending and consequently in GDP. To support the global economy, governments around the globe enacted strong fiscal and monetary policies. In the US, the "stimulus act" provided close to $800 billion in fiscal stimulus, and the Federal Reserve maintained interest rates at close to 0% levels and devised innovative programs to provide liquidity to the mortgage and the securitization markets. As a result the economy officially came out of the recession in the second half of 2009. The strong growth at the end of 2009 carried through the early part of 2010. Unfortunately, the weak labor market, limited lending to small businesses and the economic strains felt by many of the US trading counterparts in the developed world, have put the brakes to the expansion. Growth in the second quarter of 2010 was only 1.7% and the first indication for the third quarter is that GDP only grew 2.0%. Growth needs to accelerate for the economy to start creating more jobs.
While businesses (especially large, well capitalized ones) have seen an improvement in their fortunes, the consumer has taken the brunt of the financial storm. With unemployment at 9.6% and a steep loss of wealth, consumption has suffered, and consumers are less willing to part with their cash.
Nevertheless, the American consumer is fairly resilient, and consumption has resumed, though not at the same pace than prior to the recession. Third quarter GDP was aided by an increase in the personal consumption category, and a decrease in imports, though the latter are still very much in demand.
The growing fiscal deficit also limits the potential of the economy, as the government's ability to provide fiscal stimulus in the future is severely curtailed, and further monetary stimulus risks awakening the inflation spirits, though they seem to have gone into hibernation for the last two years. The private sector will thus have to be left to its own devices in the not too distant future.
On the positive side, the weakness in the dollar, makes US exports more affordable. US exports have grown 24% from the bottom in early 2009 - over the next few years we are likely to see a push towards greatly increasing US exports in particular to emerging economies, which have recovered much more rapidly than develop economies in this crisis. Furthermore, US productivity is at record highs, and salaries and hours worked are also increasing. In the mid-term this implies that companies will need to start hiring again - as the unemployment rate falls, and individuals are less fearful about their own circumstances, spending should make a more forceful comeback and the private sector should return to its normal rate of growth.
Manufacturing
The Purchasing Managers Index (PMI) by focusing on five factors: inventories, employment, new orders, production and supplier deliveries, the index provides a good measure of the health of the manufacturing sector. A reading of 50 or more indicates that the manufacturing sector is expanding, and a reading below 50 that it is contracting.
Throughout 2008 and up to July 2009 manufacturing contracted. The PMI's lowest reading of this recession (and one of the lowest ever) was measured in December 2008, at 32.5. Starting in August of 2009 the sector has been one of the brighter aspects of the economy. While we saw the best readings early in 2010, manufacturing continues expanding, and the October figure of 56.9 was encouraging.
Export & Imports of Goods and Services
For a while, as the economy deteriorated, the only silver lining seemed to be the steep reduction in the trade deficit. By July 2008 the trade deficit swallowed to over $66 billion due to the high cost of imported oil that negated the rise in exports due to the weak dollar. As the price of oil plummeted, and the US economy went deeper into the recession by May 2009 imports had fallen 35%. Exports also fell, as the world slowed down following the US, but only by 25%. May 2009 saw the smallest the trade deficit since 1999 ($24.9 billion): the weakness in US consumption, combined with a stabilization of exports produced this result. As the economy started recovering, so did the price of oil and imports of non-oil goods. Furthermore, the US consumer decided to go back to the mall, and imports look high on our priority list.
The weakness in the US dollar has helped exports, but its 24% growth from the bottom, is below the 32% growth experienced by imports. The result is that the trade deficit has expanded to $47 billion, not anywhere near the $66 billion record, but also far from the $25 billion seen last year.
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