The world's stock markets suffered another round of falls yesterday as the body regarded as the arbiter of US recessions said the American economy's 73-month economic expansion ended in December 2007.
The news came as surveys of business confidence across continents displayed further catastrophic declines. The US economy decreased at an annualised rate of 0.5 per cent in the third quarter of 2008, having grown by an annualised 2.8 per cent in the second quarter. Although it thus does not yet qualify as a recession according to the common definition of two successive quarters of negative growth, the US National Bureau of Economic Research's business cycle dating committee employs a much more flexible definition of recession, as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity."
Manufacturing in the US contracted in November at the fastest pace in 26 years, putting American factories at the sharp end of a global industrial slump, according to the Arizona-based Institute for Supply Management's factory index. At 36.2, the reading is at its lowest level since 1982. A reading of 50 is the dividing line between expansion and contraction. Similar measures from China, the UK, the euro area, and Russia also all dropped to record lows.
Asked about the NBER economists' ruling that the US fell into a recession a year ago – and that this is now the longest recession since the early Eighties – the Treasury secretary, Hank Paulson, said he didn't think the decision was going to be "big news" to Americans who have been dealing with the slowdown for some time. Separately, Ben Bernanke, chairman of the Federal Reserve, said it was "feasible" that more US interest rate cuts could be made, although with the rate now down to 1 per cent, the scope for them was limited.
The Dow Jones Industrial Average slid 7.7 per cent to 8,149.1, erasing around half of the gains made over five consecutive upwards sessions. In London, the FTSE 100 shed 5.2 per cent to 4,065.5.
Sterling fell as much a 5.2 cents against the dollar, touching $1.486, in its steepest one-day fall since the ERM crisis of September 1992, as the latest monthly survey of confidence among managers by the Chartered Institute of Purchasing and Supply (CIPS) showed that during November manufacturing output shrank at its fastest level since the survey began in 1992. Cuts in interest rates by the Bank of England and an approximate 20 per cent depreciation in sterling over the past year have thus far failed to counter-act the continuing effects of the credit squeeze and a global slump in demand.
The CIPS data suggests the outlook has worsened markedly in the past few weeks as turmoil on the world's financial markets has fed growing insecurity among businesses and consumers about borrowing – and intensified the commercial banks' reluctance to lend. Yesterday, dollar Libor rates increased and the key sterling Libor/OIS index differential also widened slightly, both additional signs that the credit crisis is far from over. Ten-year gilt yields fell to their lowest since records began 30 years ago and sterling fell, as expectations grew that the Bank of England will be forced to cut rates sharply this week.
The headline manufacturing PMI reading from Market/CIPS fell to 34.4 from October's 41.5, well under analysts' estimates of a decline to around 40.
The CIPS figures came a day after the Engineering Employers' Federation warned that British industry will see 90,000 redundancies next year. Howard Archer, UK economist at Global Insight, said "the exceptionally weak manufacturing survey" led it to believe "there is an even stronger chance now that the Monetary Policy Committee will deliver a 100-basis point cut, taking interest rates down ... to 2 per cent" on Thursday.
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