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Soft data sparks more talk of imminent US recession

"The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession."

Paul Krugman, New York Times columnist

A series of surprisingly weak reports has prompted fresh debate on whether the US economic expansion could continue through next year or succumb to a housing-led downturn.

Most economists see the economy muddling though at a sub-par growth pace, but soft data in recent weeks has sparked more talk about a recession instead of a so-called soft landing.

Raising concerns is an apparent spillover from a weak housing market to other key sectors of the economy, notably manufacturing.

In this atmosphere, it remains unclear whether consumer spending -- which represents the bulk of economic activity -- can carry the economy through.

The latest warning signs came last week in a series of glum reports on durable goods orders, construction spending and surveys on the manufacturing sector of the economy.

Friday's Institute of Supply Management (ISM) survey of manufacturing showed the first shrinkage in 41 months. The ISM index slipped to 49.5 percent last month, below the figure of 50 percent marking the point between expansion and contraction.

Orders for big-ticket manufactured durable goods fell 8.3 percent in October, while construction spending slipped 1 percent.

Federal Reserve Chairman Ben Bernanke remained upbeat in a speech on Tuesday, saying he believes the US economic expansion is likely to remain on track through next year, weathering a slowdown largely confined to the housing sector.

The government revised up its estimate of third-quarter growth in GDP to 2.2 percent from 1.6 percent. But that covers the period from July to September.

Now, many private economists are marking down their forecasts for the current quarter and beyond.

"Has the economy stalled? We think so," wrote economists Joseph LaVorgna and Carl Riccadonna of Deutsche Bank. "In light of continued weakness in the economic data, we are cutting our fourth-quarter real GDP growth forecast to zero from the 1.0 percent that we were originally predicting. This is largely due to weakness in durable goods shipments and orders, but also due to weak consumer spending."

Princeton University economist Paul Krugman wrote in the New York Times that he sees "economic storm signals" ahead.

"The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession," he said.

"If that sounds ominous, it should: the bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year," he said.

Nouriel Roubini, a New York University economist who has been bearish for some months.

"I have been arguing for a while that the US economic slowdown will worsen in the fourth quarter and 2007 and lead to a recession by, at the latest, the second quarter of 2007," he said in his economics blog.

"The housing recession is becoming a non-residential construction recession, an auto recession, a manufacturing recession, a real investment recession and soon enough a retail recession," Roubini said.

Other economists are less gloomy.

"I think what we're looking at is a soft landing and we're in the most sluggish part of that now," said Dana Johnson, chief economist at Comerica Bank, who added that the economy is being underpinned by income gains and strong job growth.
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