The US economy is in recession, if you discount the sharp improvement in the country’s trade deficit. The second update on gross domestic product released overnight revealed the US economy grew at an unchanged 0.6% annual rate in the three months to December, compared to the 4.9% annual rate in the September quarter.

It was the black hole known as the US housing sector that sucked everything into it, bar the export sector. As well a sharper than first estimated drop in inventories and a small fall in consumer spending estimates added to the feeling that the US economy is heading south, regardless of the 2.25% cut in official interest rates since the Federal Reserve started cutting last September.

Those rate cuts have done nothing to slow the pace of decline and there’s a growing feeling now that this current quarter will see more of the same and perhaps growth closer to zero and held there by another solid export performance.

US markets reckon there’s a 100% chance of another rate cut from the Fed in March and that helped push commodity prices up as the US dollar fell to yet another new low against the euro of more than 1.52. The Australian dollar jumped to 94.98 US cents in US trading, a new near 24 year high.

The figures from the US Commerce Department in its second update of 4th quarter growth showed that the improvement in the trade account stopped the US from falling into what would have been negative growth (not quite a recession, you need a couple of quarters for that according to most economists)plunging into recession. The trade deficit narrowed to an annualised $US506.8 billion, adding 0.9% to GDP.

Economists pointed out that excluding this improvement in trade, the economy would have shrunk at a 0.3% annual pace, the first decline since 2001, when the US was last in a recession.

Several optimistic economists said the positive about the GDP report from the US Commerce department was that the growth rate didn’t fall: a desperate remark when the consensus was for a small rise to an annual rate of 0.8%. There is one more update to go next month which will contain more detailed and accurate data.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey