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Friday, 3 July 2009

I don't know what the edit of the FT is smoking, but I'll have some

On Wednesday the FT carried an item in its opinion column that started

“The global downturn appeared close to a bottom on Wednesday after manufacturing figures from across the world suggested the worldwide recession was running out of steam in all big economies.”

First of all, recessions don’t run out of steam. Recessions are an absence of business activity and they only disappear when demand for goods and services is strong enough to cause increases in production. What the article went on to say was that in the past year industrial production had been cut drastically as manufacturers ran down their inventories of goods for sale, so any pick up in manufacturing activity reflects the end of that process and a hike back to more stable production levels, albeit at a lower rate than a few years ago.

But looking at the broader economy even the optimists at the FT had to admit that they were probably wrong when they read the following in the next day’s Telegraph:

So much for green shoots. The 467,000 decline in US non-farm payroll employment in June was greater than in any month of the 2001-02, 1990-91 or 1980-82 recessions.

Even discounting possible "noise" in the Bureau of Labor Statistics figures, this shows the recession is not yet bottoming.

The fall was higher than expected and reversed what had appeared to be an improving trend. US job losses in the last 12 months - totalling 5.66m - are almost twice the next highest loss on record, the 3.17m decline in the 12 months to September 1945, caused by the reduction in war-related employment.

Compared with recent US recessions, the new figure looks particularly dire. In all three recent downturns, peak monthly job losses were lower than June's. Workforce expansion put the 1980s recession's highest monthly job loss above June's in "real" terms. But the sustained rate of job cuts since the banking crisis hit last autumn is unprecedented post the Great Depression.

These losses indicate that economic activity is still on a downward slope. And there is an even more important implication for the Federal budget, sent to Congress in May.

It assumed unemployment of 8.1pc in the fourth quarter of 2009 and an annual average of 7.9pc in 2010.

Both figures now appear much too low, suggesting that the projected Federal deficits of $1.84 trillion in the year to September 2009 and $1.26 trillion in the following year are substantially understated.

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