16 Sep 2011 Stuck, and No One to Push
It has been a week of dimming hopes. More economists now believe the US will slip into recession over the next twelve months. As the president stumped across to country to sell his jobs bill to the American people, Congressional support quickly waned on both sides. And indications that Greece will default on its sovereign debt combined with the worsening undercapitalization of European banks stymie efforts by Germany and France to hold the Euro region together.
A Wall Street Journal poll suggests that economists now see a one-in-three chance the US will slip into recession over the next twelve months and they doubt the Federal Reserve can do anything to stop it. “It feels like a recessionary environment. What they call it later on I can’t tell you,” says Bart van Ark, chief economist of the Conference Board, who put the odds of recession at 45%. Since 1988, every time the Conference Board’s estimate of the probability of recession topped 40%, a downturn followed shortly thereafter.
Asked to consider what the Fed would do next, economists put the highest odds – 64%, on a program known as Operation Twist. Under such a program, the Fed would exchange shorter-dated Treasuries on its balance sheet for longer-dated bonds in a bid to push down long-term interest rates. Bill Gross of Pimco criticizes the approach saying the Fed has already extinguished credit creation in maturities less than five years and risks extending the problem.
He says that banks are being incentivized by the Fed to hold cash in reserves which yields them .25% from the Fed, rather than to buy 2 year bonds which yield only .19%. He further makes the point that you can get a better yield than the 5 or 7-year bond by using the barbell approach of putting half of your money in 30-year bonds and the other half in cash. In his words, credit is being extinguished by the Fed. For the third time since 2006, the real yield (yield less inflation) of the 30-year Treasury is negative.
The Fed’s purpose in fixing government rates so low is to drive investors seeking yield into more risky investments, such as corporate bonds and stocks. Some, like Gross wonder if the costs might not be greater than the rewards.
Manufacturing, which has been the bulwark of the US economic recovery, is beginning to falter. Manufacturing conditions as reported by two regional Federal Reserve banks are contracting. The New York Fed’s Empire State index fell modestly to a minus 8.82 this month, its fourth straight negative single-digit reading. The Philly Fed’s Mid-Atlantic region report showed some improvement, but still indicated contraction in that region. General business conditions improved to minus 17.5 from August’s severely negative reading of minus 30.7. The index has been negative for three of the last four months.
The National Federation of Independent Business’ confidence index of small businesses fell for the sixth straight month by 1.8 points in August to 88.1. The top problem according to the NFIB is sales where more firms are currently in a downtrend than an uptrend, hurting earnings. Expectations for future sales are also in decline. Only five percent of the sample says it’s a good time to expand. Optimistically though, more firms plan to create new jobs over the next three months and more are reporting unfilled job openings.
The consumer believes the economy never really recovered. Bloomberg’s Consumer Comfort Index for the week of September 11th was minus 49.3, near this year’s low of minus 49.4 reached in May. The buying climate gauge slumped to the lowest level since October 2008. Nine of every 10 Americans polled had a negative view on the economy.
One definitive measure of consumer confidence is retail sales. In August sales were flat after rising 0.3% in July. The August figure was below the market median estimate for a 0.2% gain. Retail sales on a year-ago basis in August came in at 7.2% percent, compared to 8.3% in July. Hurricane Irene no doubt had impact on East coast sales.
Inflation for August was mixed. At the producer level prices were unchanged following a bounce of 0.2% in July. At the core level (excl. food and energy), producer prices slowed to a 0.1% pace in August after rising 0.4% in July. But at the consumer level, prices barely fell, rising 0.4% following a heady 0.5% gain in July. Excluding food and energy, the CPI rose 0.2%, matching the pace the month before. On a yearly basis, overall CPI inflation worsened to 3.8% from 3.6% (seasonally adjusted) in July. The core rate accelerated to 2.0% from 1.8%.
As the president tries to find support for his jobs bill, unemployment continues high without sign of remedy. Jobless claims for the week of September 10th jumped 11,000 to an unexpectedly high 428,000. The prior week was revised 3,000 higher to 417,000. The four-week average was up 4,000 to 419,500 for the fourth straight gain with the level more than 15,000 higher than the month-ago.
While the president’s job bill has some components that enjoy bipartisan support, very little of it offers long-term or permanent remedies to structural problems in the economy. Representative John Campbell sums up the Republican opposition when he says, “we don’t need temporary anything, we need new permanent policies: tax policies, deficit policies, and regulatory policies that people can count on so that they can make longer- term decisions.”
Some worry that Europe’s problems could further drag down the US economy. UK Prime Minister Gordon Brown says that European banks are “grossly under-capitalized” and the debt crisis is more serious for the region than the 2008 meltdown as governments are constrained by fiscal pressures. Brown said that while the ECB is part of the short-term solution, it needs additional assistance. The European Financial Stabilization Mechanism is “not enough,” according to Brown. “Substantially more resources” are required, including from the International Monetary Fund and lenders including China, he said. “We’ve now got the interplay between banks that are not properly capitalized and sovereign debt problems that have arisen partly because we’ve socialized or accepted responsibility for the banks’ liabilities.”
Just now, Bloomberg reports that European finance ministers have ruled out support for the faltering economy and gave no indication of providing aid to lenders to go along with yesterday’s liquidity lifeline from the European Central Bank. Differing with US Treasury Secretary Timothy Geithner, finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.
“We have slightly different views from time to time with our US colleagues when it comes to fiscal stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing today’s trans-Atlantic finance meeting in Wroclaw, Poland. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”
In Europe and here at home, governments are running out of ‘quick fixes.’ Debt and entitlements hamstring their ability to dampen the painful shocks sovereign and corporate mistakes. Ministers in Europe have spoken – they will not use their treasuries to push their mired economies. Just what they will do remains as yet undefined.
Here at home the debate is whether more government stimulus or less government altogether is the answer. As the political stalemate continues, our economy remains stuck in the mud of uncertainty. While Europe has answered at least part of the question regarding a push, the growing consensus here is that it will take a general election 14 months away to know what kind of push to expect.
