Tuesday, September 25, 2007

Are We Headed into a Recession?

This is an issue that every economic developer is concerned about: the economy and whether we are headed into a recession. Here are some thoughts.

The economy is feeling some serious pressure from tougher financial conditions and the hatrd-pressed housing market. What isn't certain is just how much these factors are constricting growth and whether the economy is now weak enough to slip into a recession.

That's why the September jobs report is so important. Even as economic growth cooled down last year, the housing recession worsened, gasoline prices flared up, and troubles in the subprime mortgage market emerged this summer, the economy's optimists believed consumers could persevere because the labor market was solid. Wages and salaries, which account for over 60% of after-tax personal income, are growing at an annual rate of close to 5.5% this year.

But the job market has cooled off considerably in the past couple months. The August increase in private payrolls of 24,000 workers was the smallest since early 2004. While the manufacturing and construction sectors are bearing the brunt of the weakness, the pace of hiring in the service sector also faded. The weaker job growth now has consumers feeling more pessimistic about the labor market.

Economists expect a mild rebound in payrolls in September. Lower jobless claims certainly are cause for some optimism, but another poor result would raise a red flag about the resiliency of consumer spending and the economy at large.

If business aren't hiring in response to the recent changes in financial and economic conditions, they probably are holding back on spending in other areas too. August business activity reports from the Institute for Supply Management showed some softening in demand. The September results are important to see if conditions have worsened. The August factory goods data will also provide an update on conditions for manufacturers.

Even with all this not so good news, the U.S. economy expanded at the fastest pace in more than a year in the second quarter, before the sell-off in credit markets that threatens to hobble growth in the second half. Gross domestic product rose at a revised 3.8 percent annual rate from April though June, propelled by a surge in exports, figures from the Commerce Department showed in Washington. The economy advanced at a 0.6 percent rate in the first quarter.

Stay tuned. What are your thoughts?

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