The probability of a US recession is on the rise

August 22, 2011

Global Macro

Markets were once again in reverse on Friday night and with little in the way of data to trigger the selloff, it was the overriding deteriorating outlook in the global economy that eventually weighed on markets. Europe continues to stutter along, with politician’s seemingly choosing not to face the eventual binary choice of either forming a fiscal union or disbanding. A tipping point will eventually come which will force a decision however the timing of an event of that nature is near on impossible to predict.

While that event risk is certainly weighing on markets at present, it is the growing expectation that the US economy is headed for recession that is really undermining confidence in markets. Not helping the markets confidence was comments from a couple of Fed presidents with Cleveland Fed President Sandra Pianalto saying:

With my diminished outlook for economic growth and my outlook for inflation to soon fall back to 2 percent, I was in favour of providing additional support to the recovery at last week’s FOMC meeting

While New York Fed President William Dudley also had a sober economic outlook, saying that while some of the negative forces from earlier this year has abated:

It is clear that not all of the weakness was due to these one-time factors—and in light of this, I have revised down my expectations for the pace of recovery going forward

A quick recap of the last week’s data lays is out quite plainly that if the US economy isn’t already in a recession is soon could be. First of all we got the Empire manufacturing index which unexpectedly fell further into negative territory. The reason that this is so significant, as we mentioned at the time last week, is that on each occasion in its short history, whenever the index has produced consecutive negative outcomes, the US economy has been in a recession.

Then we got the Philadelphia Fed manufacturing index which completely collapsed, falling from 3.2 to -30.7, easily its lowest level since the US economy emerged from its last recession which was triggered by the GFC and is less than 10 points from its GFC low.

Now we know that part of the slowdown early in the year was caused by the Japanese natural disasters and the impact that it had on the global supply chain however it is becoming clearer that the uncertainty of the debt ceiling and debt reduction plan had a material impact on economic activity more recently as consumers and businesses delayed activity until there was a little more clarity around the outcome. However the fact still remains that whenever the annual rate of GDP slips below 2%, it’s currently 1.6%, a recession always follows.

In the first quarter the US grew by 0.1% and in the second quarter, the revision of which is out this week, the economy grew 0.325%. The market is currently expected a 0.05% downgrade which will take the quarterly increase to 0.275% however the risks lay to the downside. So while growth is not yet negative, it sure must feel like a recession, especially for the 45 million Americans that are currently on food stamps.

The Lighthouse Research Team

This blog is for information only and does not constitute advice. The Lighthouse Securities Research Team has not taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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  1. Fed hints at QE3 but knows its not enough – recession is on the way. | Lighthouse Securities - August 29, 2011

    […] He is on dangerous and tenuous ground here because after two rounds of QE the Fed has not been able to revive the US economy which is slipping back into recession as we wrote last week . […]

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