Buffett declares American economy to be in recession

There was no sign of an end to the gloom facing the US economy yesterday, as the dollar displayed yet more feebleness, the housing market continued its slump, American manufacturing declined in February to its weakest level in nearly five years, and, to cap it all, the legendary investor and American hero Warren Buffett judged the nation to be in recession.

Perhaps the biggest surprise of the day was the calm way the markets took the news, losing ground but by relatively small margins, as if the miserable outlook was already marked in stock values.

For his part, Mr Buffett, the chairman of Berkshire Hathaway – the insurance and investment company – said he didn't need such data to tell him what was happening to the US economy.

"From a common-sense standpoint right now, we're in a recession," he said.

Although many economists define a recession as two successive quarter s of negative growth, the US body officially tasked with pronouncing on the issue, the National Bureau of Economic Research, has a more flexible approach, including as a possible criteria a severe deceleration in economic activity.

Between the third and fourth quarters of 2007, US growth fell from an annualised rate of 4.9 per cent to one of 0.6 per cent. Were it not for a more healthy external account, the US would indeed be in negative growth now.

Such a picture was confirmed in the official numbers on US construction spending, which fell a sharper-than-expected 1.7 per cent in January. Predictably, given the slow market, private home building pushed the figures lower.

Meanwhile, the American Institute for Supply Management's manufacturing index slipped again, for existing and future order prospects, with both falling below the benchmark, neutral, figure of 50, indicating that activity in factories and workshops is shrinking – a disappointing development given the depreciation of the dollar and the continuing boost that ought to be offering manufacturing exports.

Export orders are still expanding, but at a slower rate than recently. The ISM output index fell to 48.3 from 50.7 in January, a little worse than economists' consensus expectations. Production fell to 50.7 from the previous month's 55.2, while new orders registered 49.1, slightly lower than the 49.5 reading in January, according to the survey. The report's employment index fell to 46 from 47.1 in January, indicating accelerating contraction.

Input costs continued to escalate, no surprise in the face of record commodity prices; but output inflation moderated. That will be a relief for the Federal Reserve, caught between a desire to avoid recession but also to nip incipient inflation in the bud.

Separately, in his annual letter to shareholders, Mr Buffett also waded into the debate on sovereign wealth funds. "This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the US. When we force-feed $2bn daily to the rest of the world, they must invest in something here."