Delayed Policy Puts US In Recession

The U.S. economy is headed for recession despite recent policy efforts to avert that outcome, says an economic research institute that closely follows business cycles.

Citing weakness in its leading index for nonfinancial services, a sector that accounts for five out of eight jobs in the U.S., the Economic Cycle Research Institute says that even if the downturn in manufacturing remains modest, the forces unleashed will have a recessionary impact on the broader economy.

"Indeed, the process of spreading weakness that leads to recessionary job losses is now underway, and it is too late to head off the recession," ECRI says.

The New York-based ECRI correctly identified the last U.S. recession in 2001, but had been reluctant to make a similar call amid a growing number of warnings that the U.S. economy was already in a recession. Economists broadly define an economy to be in a recession when it has been contracting for two quarters. In a research note in January, ECRI said that despite the collapse in housing and the meltdown in credit markets, the U.S. economy was in a "clear window of vulnerability," but a recession could be avoided if policymakers found a way to keep consumers spending.

In its latest release, ECRI says that while the stimulus packages were approved quickly, consumers won't feel the benefits for months, too late to help an economy on the verge of contraction.

"The Administration and Congress passed a tax rebate package with unusual speed, as officials noted that `time is of the essence.' Unfortunately, policymakers may not have understood what that really meant, since they were content to let the rebates start reaching consumers several months later, rather than demanding innovative ways to let stimulus reach consumers much sooner, as was needed," ECRI wrote in its latest research note, titled "A Recession of Choice."

ECRI says that in an unusual development, gross domestic product, a broad measure of economic performance, may show a milder decline thanks to the strength in manufacturing as a weaker dollar makes U.S. exports cheaper overseas.

Still ECRI says that a slower decline in GDP may not tell the whole story, as job losses and a corresponding drop in consumer confidence and spending would inflict enough damage.

"The bottom line is that the outcome was not pre-ordained. Policymakers had a choice about the speed with which stimulus took effect. If they had understood this, their actions could indeed have averted this recessionary downturn," ECRI says in the note.