By Tobin Harshaw
Now that the U.S. has survived the debt-ceiling debate, the downgrade and the topsy-turviest Wall Street week in recent memory, we can get back to focusing on the gloomy big picture. Specifically, are we going to have a double-dip recession? More specifically, are we already in one?
The Wall Street Journal did an informal poll of 46 economists who "put the odds that the U.S. is already in another recession at 13%, while they peg the chances of going that way in the next year at 29% -- up from 17% only a month ago." USA Today followed suit: "The 39 economists polled Aug. 3-11 put the chance of another downturn at 30% -- twice as high as three months ago, according to their median estimates." OK, insert your own "two economists walked into a bar" joke here if you'd like, but I'm going to take a more thorough look at what the big brains have been saying recent days.
Let's start with the official line, courtesy of William C. Dudley, president of the New York Fed. “We do not expect a double-dip recession, but clearly when the economy is growing more slowly you would have to say that the risks have risen somewhat,” Dudley said in a Q&A session with reporters on Friday. “We’re still expecting our economy to accelerate in the second half of the year.”
Not if you listen to the ex-official line, in the person of former top Obama economic adviser Lawrence Summers:
On the current policy path, it would be surprising if growth were rapid enough to reduce unemployment even to 8.5 percent by the end of 2012. A substantial withdrawal of fiscal stimulus will occur when the payroll tax cuts expire at the end of the year. With growth at less than 1 percent in the first half of this year, the economy is effectively at a stall and facing the prospects of shocks from a European financial crisis that is decidedly not under control, spikes in oil prices and declines in business and household confidence. The indicators suggest that the economy has at least a 1-in-3 chance of falling back into recession if nothing new is done to raise demand and spur growth.
Mark Zandi of Moody's Analytics likes those odds, or at least agrees with them:
Policymakers are working to shore up confidence, but whether they will succeed is a difficult call. The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow. While it remains likely that the recovery will continue, the near-term economic outlook is significantly weaker than it was just a month ago. Prospects for GDP growth and job creation have diminished substantially since our last forecast.
While omnipresent analyst Meredith Whitney's prediction of widespread municipal defaults hasn't been fulfilled, she's just as bearish on the economy as a whole: "I think you're getting increasing signs that we're at a risk for a double dip," she warned. "Our GDP number on Friday was an indication that states and local governments, which make up 12 percent of GDP, are really pulling back. We're certainly at a double dip of housing. That puts enormous pressure on the economy."
And if you're expecting something more hopeful from that great prophet of doom and gloom Nouriel Roubini, you haven't been paying attention. "At this point there is serious risk of a double-dip recession in the U.S. and most other advanced economies," he told Foreign Policy magazine. "If you look at the latest numbers from the United States, from GDP growth in the first quarter, to consumption, to housing, to even the labor market figures today, they are very weak. [The unemployment figures] were better than expected because expectations were low and the unemployment rate fell only because 200,000 people got so discouraged that they left the labor force. Otherwise it would have gone up."
For dissent, Roubini need only look at his own website, Economonitor. "What’s the decline in the rolling 12-month percentage for new claims suggesting?" asks James Picino. "The odds of a new recession are still minimal. Economic contractions aren’t normally associated with jobless claims falling by double-digits on an annual basis. And with last week’s relatively encouraging numbers for jobs creation in July offering some positive corroboration, perhaps the labor market isn’t set to capitulate after all. Yes, hope may be hanging by this one thread, but it’s a rather thick thread. If it gives way, all may be lost, but so far we’re hanging on."
Also on the optimistic side are a gaggle of economists -- Maury N. Harris, Drew T. Matus, Samuel D. Coffin and Kevin Cummins -- at UBS Global Economic Research:
In our view, the worst fears of recession and fiscal austerity probably are overblown in today’s media-fed and politically charged "court of public opinion." Following our downward forecast revisions on July 29, we still expect calendar average real GDP growth of 1.8% in 2011 and 2.3% in 2012. ... Recessions are caused by savings not being reinvested, but credit flows in the US economy remain satisfactory. Our bank lending conditions index through the spring continued flashing easier overall bank lending conditions -- a key leading indicator of private sector job formation. ... We believe this link to jobs reflects banks being pivotal lenders to those credit-constrained households and small firms whose spending is importantly governed by their access to bank credit.
Mark Thoma of the University of Oregon factors in last week's report on the decline in Americans filing for unemployment benefits, and comes up smiling. Or, at least he's not sobbing. "We are having trouble gaining the traction needed to grow robustly -- the growth rate of output and employment is far too slow -- but it is not what you’d expect to see if a double dip was just around the corner," he explains. "Don’t get me wrong, we can’t rule out a double dip by any means and the slow growth we are experiencing calls for policymakers to provide help in any case, but this does tip the scales a little bit in the other direction."
Bob Doll, the chief equity analyst at BlackRock, also finds a silver lining:
Overall, we continue to hold the view that the US economy is not headed toward a double-dip recession, though the risk of that happening, given how slow economic growth has been, is higher than normal. In a normal environment, the probability of a recession is about 15%, while we currently believe there is about a 30% probability of recession.
Since the Great Depression, there have been 30 market declines of 15% or more -- but only two of those predicted a recession. Some of those declines happened during a recession, but more than half were unrelated to recession and the market came back, which is what we believe in this case this time around. Indeed, it would be rare for a recession to begin at a time when initial unemployment claims have not gone up in recent weeks. It would also be unusual to have a recession when the Treasury yield curve is positive, as it is today. Likewise, it would be unusual to have a recession with bond spreads fairly stable as they are today. We don't anticipate a vigorous economic cycle, but we are not arguing for recession either.
“I see plenty of excellent buying opportunities amongst defensive and cyclical companies,” James Bevan, chief investment officer at CCLA Investment Management Ltd., told Bloomberg Television. “I am not really worried about a double-dip recession.”
"Everyone is gloomy. But is this pessimism getting a little overbaked?" asks Larry Kudlow. "Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong. And since we do have ultra-easy money and strong profits. I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon. The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now."
Perhaps the ultimate word in noncomforting optimism comes from Pimco's Mohamed El-Erian: "Because of the nature of our economy, it's not enough for us to have 1 to 2 percent growth. We need more than that. We already have a large unemployment problem that is becoming more structural in nature, and we have overindebted sectors that need growth. So the likelihood is that we won't have a recession, but we will feel like we're in a recession."
If the economists can't agree, can the financial journalists? "Odds of recession have risen in the last month but I’d still put them below 50%," writes G.I. at the Economist's Free Exchange. "Yes, stock and bond markets have discounted the worst, but the hard data has actually gotten better. First, there was the positive employment report last Friday, largely drowned out by Standard & Poor’s downgrade of America’s credit rating. And we now have three consecutive weeks of relatively low initial unemployment insurance claims, hinting that the labour market’s improvement continued into early August."
"If this is the beginning of a new double dip, it will have two significant things in common with the dual recessions of 1980 and 1981-82," adds Floyd Norris of the New York Times. "In each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. The recovery came when credit conditions recovered. And in each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy."
In the end, we can all spout predictions as easily as we can complain about the weather, but in the end neither the market gods nor Mother Nature pay us any heed. Let's leave off with the wisdom of George Soros: "The indebtedness of the US is not all that high. But if a double-dip recession was in doubt a few weeks ago, it is less in doubt now, because financial markets have a very safe way of predicting the future. They cause it."
So, View readers, what self-fulfilling prediction do you think the markets will make? Let us know in the comments section.
(Tobin Harshaw is a member of the Bloomberg View editorial board.)
-0- Aug/15/2011 20:18 GMT