The number of economic forecasters who believe the US economy will escape a recession is growing, as recent economic data is not as disastrous as feared. Unless turmoil hits financial markets yet again, who knows, in a few months from now we may  be discussing the 'much awaited and feared US recession that never came'! By Vivek Sharma

As it happens every week, US-based electronics retailer Circuit City's promotional mail landed in my inbox the other day. I had purchased a digital camera many months back from its online store, as a birthday gift for a niece studying in an American university.

Ever since, I regularly receive enticing offers to buy all sorts of gadgets. This week's mail was different; it offered advice on how to spend tax refunds. To make it more convenient, there was a feature which allowed browsing their products on the basis of the size of your tax refunds. If your refund is $600, this is what you can buy and if it is $1,200, you can try these and so on.

An Indian citizen, I won't be receiving any tax refunds this week. But millions of Americans will, under the Bush administration's 'stimulus' package aimed at avoiding a recession, or at lessening the pain if the US is already in a recession. More than 100 million American families have received, or are about to receive refund cheques of $600 or more.

The stimulus package will cost the US government as much as $168 billion, including tax breaks to businesses.

When announced earlier this year, the stimulus was seen as a desperate attempt to stem the economic decline, with little chance of success. But, it seems to be working. Retail sales in April, excluding fuel and cars, were surprisingly resilient and showed a modest rise. Though consumer sentiment remains weak, it is likely that consumers opened their wallets in anticipation of the tax refunds.

Cash, cash everywhere
If you were to believe Ben Bernanke, the primary job of a central bank is to flood the markets with cash when there is a crisis. That is what he said in a speech earlier this week and he has followed that dictum to a fault in the current credit crisis.

Alone and sometimes in concert with other big central banks across the world, the US Fed has pumped in liquidity as if there is no tomorrow. There was money on the table for any financial institution in need, and that too any amount they needed. The Fed extended this discount facility, traditionally available to commercial banks or depository institutions, to non-depository institutions like prime brokers on Wall Street.

The logic behind this approach is pretty simple – the big financial institutions should be protected from collapse at any cost. Else, fear will take root and the credibility of the entire financial system will be shaken. The flood of money and the steep cuts in interest rates by the Fed did avert a market-wide meltdown or a contagion. While the losses booked by the big banks were mind-numbing, the US economy or the markets did not crash.

Now that the Fed's proactive, and controversial, measures seem to be working – at least so far – some economists now believe the US economy will escape a recession because the central bank remains fully committed to pump in more money, if required. Not even once has any Fed official shown any concern about overdoing it, which is providing more cash than required.

Bernanke was categorical this week when he said the Fed remains committed to doing anything within its power to ease market liquidity. He went on to urge the large banks to expedite their capital raising programmes, which he said will help the economy by increasing credit availability.

Inflation is not out of control, at least not yet
Whenever a central bank cuts interest rates, the biggest concern is that it will soon push up inflation. When the Fed started its easing cycle last year, the inflation scenario was poised rather precariously. Energy and other commodity prices were very high and labour markets remained tight, despite the credit market weakness. The US dollar was slipping, which will push up import prices. So, when the Fed cut rates by a total of 3.25 percentage points within a short period and oil prices continued to rise, inflation should be shooting up.

But, that is a yet to happen. Consumer inflation for the month of April came in at 0.2 per cent, which is actually a comfortable level. Core inflation, excluding energy and food prices, was at 0.1 per cent. These are the levels that prevailed before the Fed started cutting interest rates.

Housing woes continue
Most economists and commentators have been eagerly anticipating a housing market bottom for more than a year now. While there are no signs of a recovery yet, it now seems likely that the worst may be over. The rate of decline in home sales and prices has slowed down and it is no longer a free fall, though they still continue to get weaker every month. Housing starts unexpectedly increased in April, though the growth was entirely because of multi-unit apartment buildings.

Single family housing starts, a more significant indicator considering the demand patterns, continued to decline but single-family housing permits increased.  Not anymore is it preposterous to suggest that things will improve in the housing market later this year, or by next year.

What will help the housing market the most in coming months is a new US Senate plan to insure home mortgages. The new plan will extend an existing government proposal to guarantee mortgages totalling $300 billion, enabling borrowers to refinance at cheaper rates. The proposal also includes increased assistance and oversight of housing finance companies.

Despite the decline over the last couple of years, US home prices are still above their long term averages. That means prices will have to fall further before houses become affordable to middle-class Americans without the help of 'teaser interest rates' or 'interest-only mortgages'. That is definitely a long way off, maybe even a couple of years. It is beginning to look as if the market bottom is near, though it is a bit premature to confirm this is not yet another false start.

Has the US really escaped a recession?
Consensus forecasts were that the US GDP will contract during the first quarter. While some of the forecasters upped their estimates towards the end of the quarter on positive data, none had bargained for the 0.6 per cent growth as per the early estimates. Though the growth was almost entirely because of inventory gains, a positive growth number was very comforting. It is now widely expected that first quarter growth will be revised to 1 per cent.

The optimism is now percolating down the ranks of economic forecasters. Macro Economic Advisers, one of the leading forecasters, now expect the US economy to expand 2.5 per cent during the April-June quarter. For the July-Sep quarter, they expect an even better performance at 3 per cent. Global Insight, another widely followed forecaster, still expects a contraction in the second quarter before a rebound in the third. The firm predicts third quarter growth of between 2 and 2.5 per cent.

While there are many pessimists still out there, suddenly there seems to be wave of optimism about the US economy. Recent data do not point to the disaster around the corner, as many feared until recently, and are in fact better than even optimistic forecasts.

Unless turmoil hits financial markets yet again, who knows, in a few months from now we will be discussing the 'much awaited and feared US recession that never came'!