US recession fears grow as consumers curb spending

Wednesday, August 3, 2011
By Paul Martin

America consumer spending has fallen for the first time in almost two years, raising the spectre for some economists that the US is heading for a second recession, although it didn’t prevent one credit rating agency from reaffirming its triple-A credit rating.

By Richard Blackden
Telegraph.co.uk

The 0.2pc drop in spending in June signals that the consumer-driven engine of the economy is faltering in the face of a high unemployment rate and still depressed housing market. The report from the Commerce Department did show that incomes rose 0.1pc, but Americans are now choosing to save more of what’s left of their pay after taxes.
“We’ve become a lot more worried in the last month,” said Michelle Meyer, an economist at Bank of America Merrill Lynch. “The economy is giving us lots of signals to alert us to its weakness.”

Fresh evidence of the slowdown echoed around Congress as the Senate voted to approve the last-ditch deal to raise America’s $13.4 trillion (£8.8 trillion) debt ceiling, averting a default. While avoiding what most believed would have been a financial catastrophe, the agreement also underlines that the US now faces a new fiscal headwind for the first time. “The question isn’t whether a fiscal drag is coming,” said Michael Gapen of Barclays Capital. “It’s how big it is going to be.”
Despite rating agency Fitch confirming it was happy to maintain the US’s AAA rating the market and dollar were stuck in negative territory with more focus on S&P’s response to the debt agreement.
The majority of the $1 trillion in agreed initial spending cuts don’t begin until 2013, but given the already weak backdrop it was enough to prompt talk of a second recession. Anthony Doyle, a fund manager at M&G, argued that history shows that when growth slips below 2pc in the US a recession usually follows. That echoes a paper by Jeremy Nalewaik, an economist at the Federal Reserve, who says that growth of 1pc or less is “a moderately useful warning sign that the economy is in danger of falling into recession”.

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