Warren Buffett declares America in recession

Suzy Jagger and Dearbail Jordan

Warren Buffett, the billionaire investor, today declared that the United States was in a recession as he withdrew an offer to bail out the increasingly troubled bond insurance industry.

Mr Buffett, the world's third-richest man, said that "from a commonsense standpoint right now we're in recession", despite the fact America had yet to report two consecutive quarterly falls in gross domestic product, the technical definition of a downturn.

He conceded that the economic environment was "nothing like '73 or '74", when the US was in recession and inflation reached 12.1 per cent, but he said that investors should not rule out the possibility of a severe downturn.

Evidence that the recession in residential construction has spread across America's entire building industry emerged today after official numbers showed a sharp slowdown in public and corporate projects.

Construction spending overall in January dropped 1.7 per cent, far worse than Wall Street's expectations of a 0.7 per cent decline. However, for the first time in two years, non-residential and public sector building - which includes new hospitals and office blocks - shrank 1.2 per cent.
The grim construction data suggests that the credit crisis which erupted last summer has hit company spending, spilling over from the financial sector across corporate America as a whole.
Manufacturing data published yesterday also showed another sharp slowdown in February with output at its lowest since April 2003.

Wall Street is expecting another half a percentage point interest rate cut this month, which would see the cost of borrowing fall to 2.5 per cent.

Meanwhile, Mr Buffett also confirmed that a deal to reinsure $800 billion (£403 billion) worth of government-issued bonds, known as municipal bonds, was "not on the table" any longer.
The bonds had been underwritten by MBIA, Ambac and Financial Guaranty Insurance and a deal would have provided a significant boost to the industry. It is feared that insurers will not have sufficient funds to pay billions of dollars worth of claims on toxic investments.

It is understood that Mr Buffett had offered to reinsure the bonds but only at a steep premium which was rejected by the three insurers. However, Mr Buffett had kept his offer on the table until today.

Last week his company, Berkshire Hathaway Investments, revealed an 18 per cent fall in fourth-quarter profit as income from insurance underwriting fell. Full-year profit rose by 20 per cent to $13.21 billion.

Berkshire Hathaway invests in 76 businesses including Tesco, the UK's largest supermarket, of which it owns 2.9 per cent.