The R word is with us again. Recession in the US brought about by the parlous state of its housing market and by the squeeze being put on businesses by the drying up of liquidity is now being talked about openly. Other developing economies have been growing strongly but the health of the US economy is still pivotal to global growth. When some downbeat statistics emerge, investors can be seen scurrying for cover.
Doubtless, the Fed will be torn over what to do for the best. Providing liquidity to bail out financial institutions will not be high on its list of priorities, so swift and dramatic rate cuts look unlikely. On the other hand, the slowing of payroll numbers may conceal a bigger problem. Employment figures are notoriously difficult to reconcile. There is a big bank of illegal labour in the US, mainly from across the Mexican border. The fact that US non-farm payroll numbers are now in decline may simply be the numbers catching up with the reality on the ground.
Many of these illegal workers are employed in the construction industry, which has been suffering for some time. It is highly likely that the slowdown in building activity has resulted in layoffs initially among those workers with no real right to be there. This appears to be borne out by the traffic in Western Union money transfers as workers repatriate their earnings to their less well-off families back at home. Usually in excess of $50bn a year, these have been tailing off recently.
The implications are that layoffs in the construction sector have been rising for some time without being picked up by the official statistics. This may make the Fed consider more carefully how to react to this current crisis. The expectations are now that rates will come down, probably all round the world, but will that be sufficient to head off a US-led recession?
By now we will know whether an initial step has been taken. The Fed was due to pronounce on interest rates on Tuesday. Unfortunately, this alone cannot solve the current problems but at least we will have a steer. Anyway, there is plenty going on elsewhere in the investment world to remove the necessity of speculating on events that will be history by the time this column is read.
For a start, demand for raw materials remains buoyant. Oil has been strong, with all the indications being that the additional wealth created for the oil-rich nations has boosted demand among producer countries. The boost to agricultural commodity prices continues, with the OECD blaming the rush to produce biofuels. Shipping remains stretched as cargo carriers endeavour to keep pace with global demand. None of this seems consistent with an impending recession.
At this stage, the range of possible outcomes is wide indeed, from a 1930s-style depression to the resumption of global growth at the levels we have come to expect. What is clear is that credit markets will not be the same although experience suggests that memories in the financial world are short, particularly when juicy profits are in prospect.
What does seem remarkable is the way emerging markets are holding up. Whatever investors might expect from the resolution of the twin problems of the credit crunch and the slowing of the US economy, it is clear that the markets of the lesser developed countries are perceived to have gained a certain maturity in the redistribution of global wealth that has been taking place.
In the end, they may hold the key to a resumption of global growth. These billions of aspirant consumers have a potential appetite that will eventually surpass the US consumer. First we must travel through current stormy conditions. A safety-first policy still looks to be good sense and keeping an eye on those statistics, however misleading they might be, continues to be important.
Brian Tora (firstname.lastname@example.org) is principal of The Tora Partnership