Staring into the eye of recession
After the US GDP revisions we saw on Friday, it is clear that the US economy is at stall speed. But globally, we are seeing a slowdown in Europe and emerging markets too, especially China. And the fact is monetary and fiscal policy are tightening in all three areas as well. To me, this speaks to a sharp global growth slowdown, which means Europe and the US will be “staring into the eye of recession” as Andy Lees entitled his note on which this post is based.
Considering the proposed budget deal to lift the debt ceiling, I think Brad DeLong has the medium-run implications right:
“A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline. A hideous waste of opportunity. There is nothing in there to boost employment and capacity utilization. Absolutely nothing.”
Note that the President is on record saying that these cuts are not so abrupt so as to weaken an already sluggish economy.
This blurb from Andy Lees this morning is relevant from a global context:
US consumer confidence as measured by the Conference Board is now 59.5. Chart 1 puts that in the context of its long term levels. Going back to 1970, every time the index has been below the present level, with the exception of the rebound from Q3 2009 until present (ie when the Fed was expanding its balance sheet), the economy has been in recession. The second chart overlays the University of Michigan consumer confidence index against the main conference board data. If we took the level implied by the Michigan data then we would be at a level comparable to the 1974 low and worse than either the 1980, 82 or 1992 lows. The only period worse would be the Q1 2009 low.
Purchasing managers data worldwide has been poor. Britain’s fell to 49.1, Ireland’s 48.2, Spain 45.6, Taiwan 46.1 and Australia an incredibly weak 43.4. Even the Chinese HSBC survey which differentiates itself from the government survey with its inclusion of SME’s is now below 50 at 49.3. Last month after the US ISM data I highlighted chart 3 showing the differential between the ISM index and the ISM forward looking index of new orders minus inventories, which is now back to levels associated with previous recessions or massive monetary stimulus in 1984 (a 175bpt rate cut in 1 meeting followed by 2 * 50 bpt rate cuts in the subsequent month) to avoid a recession. For the moment the US has just ended QE2, Europe is tightening and as yet China is unable to start stimulating although it probably could move quickly if there was a deflationary pulse.
After the US GDP revisions we saw on Friday, it is clear that the US economy is at stall speed. But globally, we are seeing a slowdown in Europe and emerging markets too. And the fact is monetary and fiscal policy are tightening in all three areas as well. To me, this speaks to a sharp global growth slowdown, which means Europe and the US will be “staring into the eye of recession” as Andy Lees entitled his note on which this post is based.
What will act as a counterbalancing mechanism when we are still getting major job cuts from the likes of Merck, HSBC, RIM, Goldman, Cisco and Borders? GE, the firm of President Obama’s jobs czar Jeffrey Immelt, is still shifting jobs to the emerging markets away from developed economies. I don’t see any chance of powerful job growth in North America or Europe, especially with the public sector in contractionary mode.
To me this means Europe and North America are at stall speed with few if any mitigating factors to forestall recession in the event of an exogenous shock. In my view the macro backdrop is weaker now than it was at this point in 2010 when I felt second half job growth would be a mitigating factor. This time, large-scale job cuts seem to be popping up more frequently. Will the Fed ride to the rescue? Could it? I doubt it.