US Economy: Recovery not just around the corner - Views on News from Equitymaster

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US Economy: Recovery not just around the corner

May 2, 2001

The GDP growth figures for the US economy released recently indicated a growth of 2% for the first quarter of the fiscal 2002. Many feel that this could be the first sign of a recovery or at least an indication that economy may just avoid a recession. The GDP growth figure is up from 1% in the fourth quarter of fiscal 2001. The growth in the economy was on the back of a strong consumer spending, which accounts for two-thirds of the U.S. economy. While the consumer confidence index had shown a downward trend for the first two months of the quarter for the month of March it had shot up to a level of 116.9. But the figures released for the month of April indicate a drop again. The index now stands at 109.2. According the Commerce department consumer spending and personal incomes rose in the month of March.

The University of Michigan's April final consumer sentiment index, which measures consumers' attitudes about the economy, fell to 88.4 in from 91.5 in March. The preliminary reading two weeks ago, before the Fed made its fourth rate cut, came in at 87.8.

The main culprits for the weakening of the consumer confidence index are a deteriorating business scenario and a less-favorable job market. With companies cutting thousands of jobs in recent months, the job market has weakened substantially and consumer confidence has been taking a hit. This is due to the fact that the employment sector has been shrinking faster than the manufacturing sector.

The number of new jobless claims has risen to a five-year high figure. According to the U.S. Labor Department stood at 4,08,000 in the week ended April 21 up from a figure of 3,90,000 in the previous week.

If the trend of weakness in the job markets continue the US economy may not be able to sustain growths as seen in the first quarter.

Meanwhile the manufacturing sector continued to shrink but for April the rate of shrinking was slightly lower than that seen for March. The National Association of Purchasing Management's (NAPM’s) key index of manufacturing activity rose to 43.2 in April from a reading of 43.1 in the previous month, the NAPM said. In terms of the rate of decline, the worst might probably be over. The declaration of the economy might be slowing down. The other data that gave support to the belief included inventory reductions and lower prices for materials. The rate of new orders also shrank at a slower rate than in March.

The NAPM index is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 industrial companies. A reading below 50 indicates a shrinking manufacturing sector; a reading below 42.7 percent points to a contraction in the overall economy.

The employment should pick up as the economic slowdown decelerates, this would in turn increase consumer spending. However, volatile energy costs could hamper a recovery in the second half, especially if a rise in gasoline prices dampens consumer spending and energy shortages raise prices manufacturers pay.

As the uncertainly looms large the Indian software industry’s valuations seem to sway correspondingly. Meanwhile, Indian software companies one after the other seem to be feeling the heat of the US economic slowdown. Nasscom has already lowered its projections for the growth of software exports. The growth earlier projected at 52% was lowered to 40-45% in mid April. But the question now is will the Nasscom numbers hold?

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