US recession: the end of the argument

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The argument is over.

The US is in recession. There's simply no pretending otherwise unless of course you are the chairman of the Fed, or one of the many fund managers with your future mortgaged to the US stock market.

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So what makes it so obvious? The employment numbers. The US lost 63,000 jobs last month, the biggest drop since the start of the Iraq war over five years ago, and the latest in an increasingly gloomy trend. The private sector has now shed an average of 47,000 jobs every month over the past three, with no pick up in sight.

"The 63,000 decline in US non-farm payrolls in February is the clearest and most reliable indication yet that the economy is now in recession", said Paul Ashworth of Capital Economics. And if you thought that was bad, the decline of 101,000 in private sector payrolls last month, compared to a modest 26,000 drop in January "screams recession".

The debate, says Ashworth, is "essentially over'...

No jobs, no salaries, no mortgages

So what next? Nothing good. People are losing jobs. And when they have no salary going into their bank accounts every month they can't pay for anything, including their mortgages. So rising unemployment suggests more pain for the mortgage markets and by extension for all the banks. Expect the banks to keep getting kicked about in the markets.

All this is making us and finally everyone else nervous. On Friday, it was the turn of Larry Summers, the former US Treasury secretary to up the stakes. Not only is the economy "currently in recession", he said but probably seeing the "most serious combination of macroeconomic and financial stresses that the US has faced in a generation."

With cheerleaders like this it should be no surprise that the yield on 3-month US treasury bills has collapsed to just 1.3%. That's the lowest since august 2004, and suggests a rock bottom level of confidence in the economy (low yields reflect an assumption of falling interest rates).

Meanwhile, banks are getting increasingly cautious about who they lend money to and when they do lend they are charging more for it than they have in some time: sterling three-month libor, the rate at which banks lend to one another, is rising. On Monday, it stood at around 5.78%, up from 5.4% in January.

How long will all this last? Ethan Harris, Chief Economist at Lehman Brothers, has a rather gloomy forecast. He predicts growth rates of -0.5% and -1% for the first and second quarters of 2008. The classic definition of a recession is two concurrent quarters of negative growth. "The economy is likely to experience an extended period of very weak growth, a rising unemployment rate and significant further Fed rate cuts," he added. "This is a bigger, but more gradual, shock to the economy than either the 1990 or 2001 recession."

So with the economy dominating the news, we can now be clear on two things that not too long ago seemed rather impossible

Two impossible things

The first, is that as the faltering economy kicks Iraq off the front pages, Hillary Clinton is a shoo-in as the next US president.

Blue collar voters along the depressed economic rust belt, the UnitedState's manufacturing heartland running from New York and Pennsylvania to Ohio, have suffered more than any other workers in the US. Their labour intensive jobs have been outsourced overseas, and they blame free trade and the wicked agreements that accompany it, namely NAFTA, for their woes. Clinton has pushed for a complete renegotiation of the treaty. Barack Obama has been sketchy on his own plans. And because they're swing states (both Ohio and West Virginia went to Bush back in 2004) they should tip Clinton's way as unemployed and nervous workers back her ahead of Obama, ora war hero like John McCain with little economic experience.

The second thing is that the decoupling theory has been completely debunked. As the US slows, so slows the world. Chinese exports of steel products fell a massive 29% year on year in February. Why? Because much of the steel once headed to the US housing sector which has collapsed. Exports to the US dropped from $19.2bn in January to £15.5 billion, as plumbers and plasterers all over the country laid down their tools.

Chinese jobs are already going too. Expect them to keep doing so as the US consumer stops spending, and exports to the US, which currently stand at 21% of total exports, start dropping.

Investors and central bankers should prepare for things to get a lot worse.

Turning to the wider markets

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Bovis weighs on housebuilding sector

In London, weaker metals prices weighed on mining stocks yesterday whilst housebuilders fell in sympathy with Bovis Homes, which warned that volumes would fall steeply this year unless the Bank of England cut interest rates. The FTSE 100 ended the day 70 points lower, at 5,629, and the broader indices were also lower. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 lost 51 points to end the day at 4,566. And in Frankfurt, the DAX-30 closed 65 points lower, at 6,448.

Across the Atlantic, the Dow Jones fell 153 points to end the day at 11,740. The tech-rich Nasdaq closed 31 points lower, at 2,181. And the broader S&P 500 fell 16 points to end the day at 1,267.

In Asia, stocks rallied near the end of the session as bargain-hunters stepped in. The Japanese Nikkei gained 126 points to end the day at 12,658. And the Hang Seng had risen 290 points to 22,995 in Hong Kong.

Oil tops $108 a barrel

Crude oil futures were trading below yesterday's record high of $108.21 this morning, at $107.75. And in London, Brent spot was at $104.64.

Spot gold had fallen to $973.70 from $974.10 and silver had risen to $19.83 this morning. Meanwhile, platinum rallied 4% to $2,060 from $1,926 - its lowest level in four weeks - as speculators stepped in.

Turning to the currency markets, sterling had fallen back from a three-month high of 2.0220 against the dollar and was last trading at 2.0139, as the latest RICS data (see below) increased expectations of rate cuts. Sterling was also trading at 1.3064 against the euro. And the dollar was at 0.6484 against the euro and 102.04 against the Japanese yen.

RICS: housing slump worst since 1990

And in London this morning, the Royal Institution of Chartered Surveyors' latest survey revealed that the UK housing market has slumped to levels not seen since just before the last recession which began in 1990. The number of estate agents and surveyors reporting falling prices exceeded those reporting gains by 64.1%, the biggest difference since June 1990.

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