Going through the list of data releases of the past two weeks, I noted many numbers down but just as many were either flat or up, so no clear indication of a recession. Then came the US Retail Sales Report for December and everybody sat up straight. Excluding automobiles, US retail sales were down 0.4% from November. This statistic in itself is not a smashing number, was it any other month of the year, but it caught wide attention as it was expected to exceed November sales by full percentage points rather than fractions. Instead it came down almost half a percent.
These figures have to be seen in context. The definition for a recession is based on quarterly performances so, strictly speaking, only in April will we be able to clearly see whether the world's largest economy is in recession or not. The 2007 fourth quarter, although not impressive, certainly did not show an economy in decline. One also needs to bear in mind that there is a clear difference between a contracting economy (actually shrinking) and a slowing economy (growing at a lesser pace).
The truism that when the US economy sneezes the rest of the world catches a cold is now more evident than ever. Many people wanting to have a better understanding of local economic dynamics ask me what this has to do with us if American consumers cannot afford their homes on a month to month basis. And unfortunately, I always have to tell them: Everything!
Our livelihood is dependent on a commodities driven economy. This we sell as primary products, with almost negligible local value adding, to processors and manufacturers the world over, but most notably in South Africa, Europe, China and India. A significant portion of the aggregate manufacturing output in the first two is exported while the bigger part is for their local markets. With China and India, the reverse is true. These economies, together with a host of other producing nations in Asia, are export driven meaning they depend heavily on producing goods at competitive rates, and exporting these goods, en masse, to consumers in Europe and the United States. Of course, they export to dozens of other countries as well but the figures simply do not compare. More than half of what is produced in the Asian economies goes to the US market and a not insignificant slice goes to Europe.