The recession in the US is over. Official confirmation came with the news that its gross domestic product grew at an annual rate of 3.5 per cent in the third quarter – slightly better than positive forecasts.
Stocks rallied, while the dollar sold off. The numbers were a good enough reason to halt the recent return of risk aversion. In the short term, the key to whether risk appetite can return, will depend on the data that is due next week, and crucially US employment.
This is clear from a look at how the rebound in GDP was achieved. Household disposable incomes actually fell during the quarter, by 3.4 per cent, but consumer spending rose, also by 3.4 per cent. This is not a pattern that can be sustained for long, and it is inconsistent with the need for US families to pay down their debts.
Consumption rose largely because of a huge increase in expenditure on durable items, led by motor cars. Government subsidies through the “cash for clunkers” programme, removed before the quarter had ended, largely explain this.
Meanwhile, tax credits for homebuyers, which helped revive activity in the housing market, are due to be withdrawn later this year. The question now is whether higher consumption can be sustained without government support.
The hope is that the rebound in activity will help consumers to feel more confident. But the Conference Board’s surveys of consumer confidence, and the growing dissatisfaction with the economy reflected in political opinion polls, show it has not yet had that effect.
The likely reason for this is unemployment, which keeps rising and saps the confidence of all touched by it. Thursday’s new data on initial claims for unemployment insurance confirmed that the rate of the rise in joblessness has slowed significantly – but the jobless rolls are still rising faster than at any time this decade, before the financial crisis took hold.
This explains why consumers are not feeling better, even though the recession is over.
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