Is US Heading Into Recession?

As global investors watches the global stockmarket development in a cautionary mode, I recalled former US Fed's chief Alan Greenspan's comment that there is a possibility of US heading into recession by the end of the year. The current Fed Chief Ben Bernanke had subsequently clarified that this will not be the case. So the big question that we all would like to seek an answer quickly is whether US is indeed heading into a recession? The weakening housing market and increasing number of bad loans seem to be the leading indicators to support such claim but latest development appears to have given us a ray of light. Let's explore further.

On Friday, US Commerce Department declared that the US trade deficit has narrowed 3.8% in January to USD$59.1 billion thanks to record-breaking export growth. It was indeed a bigger drop than expected on Wall Street, and marked the biggest change in the trade data since October 2006. It is widely expected that the trade deficit will continue to fall in the next couple of years. This is indeed a welcoming news to further boosting US economy. The view seems to be further reinforced by a stronger than expected US Job data released Friday, suggesting continued growth, albeit slower. Combining the above two factors forms a pretty consistent scenario with the theory of Goldilocks economy, which is a phrase used to connote a desirable level of economic growth without inflation, in other words, not too hot (inflation) and not too cold (recession). In the U.S. economy, this is when GDP growth is around 3% and inflation is around 2%. As we speak, the Fed is predicting US GDP growth in a range of 2.5 to 3.0% for 2007.

In my view, as long as the above scenarios hold, we are probably seeing the US heading into a softlanding instead of hard landing. So for investors, we could probably sleep better at least for now...