Thursday, March 13, 2008

Is the US Economy In or out of recession?

This is the RBC viewpoint on whether the U.S. economy is in or out of recession?

The pace of U.S. economic growth is expected to remain lacklustre in the near-term as the impact of the recent increase in the cost of borrowing weakens business activity; the housing market recession rolls on; and even the indefatigable U.S. consumer pares back spending on worries about the labour market, eroding net wealth, rising borrowing costs and more restrictive access to credit. Modest support will come from the trade sector — export growth is forecast to outpace imports as the past weakening in the U.S. dollar supports foreign demand for U.S.-made goods and lessens U.S. demand for foreign-made products.

Whether the economy falters is only important if the decline is deep and prolonged.

We believe that the third-quarter outlook is brighter because the large fiscal stimulus package passed earlier this year is likely to revive consumer spending activity.

We are assuming that about one-half of the more than $100 billion in tax rebates given to U.S. households will be spent mainly in the third quarter, boosting the annualized quarterly consumption growth rate by two percentage points and adding about 0.3 percentage points to 2008 GDP growth. This revival in consumer spending is expected to stem the weakening in the U.S. labour market. At the same time, the lagged effect of the Fed's aggressive easing campaign and more stable financial market conditions will shore up household balance sheets, setting the stage for stronger growth in 2009.

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