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Why the ‘R’ word just won’t go away in U.S.

A clerk straightens out her display at a shoe store in Salem, New Hampshire. The U.S. Commerce Department’s third and final estimate of second-quarter economic growth release Thursday was 1.3 per cent, compared with an earlier reading of 1.7 per cent.

Elise Amendola/Associated Press

It's only a murmur, but the possibility of a U.S. recession is back in the air.

The Commerce Department's third and final estimate of second-quarter economic growth was 1.3 per cent, compared with an earlier reading of 1.7 per cent. A separate report showed durable goods orders plunged 13.2 per cent in August, much worse than most Wall Street forecasters were expecting.

Not the nicest way to start the day.

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The GDP figures rarely change so markedly between second and third estimates, and the third-quarter now is the second-worst since the end of the recession, according to Jimmy Jean, senior economist at Desjardins Capital Markets. The sharp decline in orders of durable goods is exaggerated by drops in volatile segments such as aircraft, but nonetheless confirms U.S. industry effectively stalled over the summer. And with growth slowing in most of the world's major economies, there's little reason to expect a meaningful rebound.

But there's another piece of data that is a greater cause of concern for some analysts. Earlier this week, Tom Porcelli, chief U.S. economist at RBC Capital Markets, flagged the Federal Reserve Bank of Philadelphia's coincident index of economic activity in each state. (The measure combines employment, average hours worked in manufacturing, the unemployment rate, and wages.) And Thursday, Mr. Jean brought the data to the attention of his clients.

The reason for the alarm over an obscure indicator: the latest reading signals a downturn. The three-month diffusion index was 24 in August; in previous recessions, the index averaged 41 at the moment of entry, according to Mr. Jean.

"In the last 32 years, a level of 24 has always been associated with a recession," Mr. Jean said in a note to clients. "To be sure, we have had many false recession signals in the past two years, but that does not mean they should be ignored."

The news isn't all bad Thursday.

First-time U.S. jobless claims decreased by 26,000 to 359,000 last week from the previous week, and the four-week moving average declined for the first time in a month, dropping to 374,000 from 378,500. The Labor Department also released revised data that show the U.S. economy created an average of 192,000 jobs a month over the year ending in March 2012, instead of an average of 162,000, according to High Frequency Economics. The Labor Department's revisions indicate non-farm employers added 386,000 more positions that were previously reported.

Over all, durable goods orders aren't as bad as the headline number suggests. Orders for aircraft and parts fell 83.8 per cent on the month, and orders from motor vehicles declined 10.9 per cent. These segments typically are volatile. To gauge the trend, economists watch non-defense orders of capital goods excluding aircraft. These orders rose 1.1 per cent.

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But there is no denying the U.S. economy is coasting, lacking any significant propulsion. Sure, core durable goods orders rose in August, but from a downwardly revised 5.2 per cent decline in July and a 2.7 per cent drop in June.

GDP growth has slowed from an annual rate of 4.1 per cent in the fourth quarter of 2011 and two per cent in the first quarter of this year. Half of the revision in the second quarter number came from changes to farm inventories as the Commerce Department attempted to account for the drought, according to IHS Global Insight.

However, even without the drought, GDP would have been revised lower in the second quarter, as consumer spending declined and exports deteriorated.

There's little reason to expect the pace of growth in the U.S. will pick up. Signs of life in the housing market and stronger stock prices could lift spending, but exports are certain to decline further as the global economy has weakened in the second half. That suggests more of the same: growth that is strong enough to prevent a recession, but not strong enough to keep people from talking about one.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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