Early Feb, 2006
I have been looking through the GDP release from the US office of Economic analysis to try to better understand what seems to be happening in the US economy. The release which was made available on January 27 shows that the output of goods and services produced by labor and capital located in the US increased at an annual rate of 1.1 % in the fourth quarter of 2005.This was a marked slowdown form 4.1 % in the 3rd quarter of 2005.
The last time there was such a sharp drop was in the last quarter of 1999 to the first quarter of 2000 when growth fell from about 7 % to just over half a per cent in the first quarter of 2000. This was followed by another sharp rise in the second quarter to over 6 % and then 3 non consecutive quarters of negative growth in the 3rd quarter of 2000 and the first quarter of 2001 and the 3rd quarter of 2001. They were separated by the last quarter of 2000 at 2 % and the 2n quarter of 2000 at about 1 %
.So there is some recent evidence that shows such a sharp drop in GDP growth fuelled by a slowdown in both consumption and private investment can lead to rising unemployment and a recession.In addition the leading diffusion index which is a composite of a number of business cycle indexes also may be turning negative.
In the past this was an accurate predictor of a recession in the coming 6 to 8 months. Finally of course the Fed has increased the Federal Funds rate from about 1 % in 2004 13 times over the past 2 years so that it now stands at 5 %.
Such a large increase also slows growth and may well have already overshot the mark in terms of the mythical soft landing for the economy. Typically in previous US recessions the Fed continues to raise rates well into the beginning of a recession typically because they misdiagnose the problem and overshoot on the anti-inflationary side. This is particularly likely when most , if not all, the inflationary impulse is coming from the oil cartel.
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