With spending and investment portfolios declining in the midst of a household debt contraction our chances of going into recession are rising.
Household spending fell in June for the third straight month; never in the past five decades has this happened outside of a slump.
The Standard & Poor’s 500 Index plunged 16.8 percent in 11 days, performance that’s occurred only twice since at least 1970 without indicating a downturn.
Signs of recession haven’t been missed by Federal Reserve Chairman Ben S. Bernanke and his colleagues, who pledged this week to hold interest rates at a record low through at least mid-2013. Officials said they “discussed the range of policy tools” to strengthen growth and are “prepared to employ these tools as appropriate.”
“Downside risks to the economic outlook have increased,” according to the Federal Open Market Committee statement after the Aug. 9 meeting. Consumer spending has “flattened out,” the labor market has deteriorated and the expansion is “considerably slower” than expected.
Five of the nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of when recessions start and end, say the expansion may be ending. While the group doesn’t forecast the odds of a contraction, individual members can make their own predictions. Martin Feldstein, a member of the NBER panel, said last week he sees a 50 percent chance of a new recession.
Gross domestic product, adjusted for inflation, cooled to a 1.6 percent rate in the second quarter from a year earlier. About 70 percent of the time when the pace has fallen below 2 percent, a slump has followed within a year, according to data since World War II in an April study by Jeremy Nalewaik, a Fed board staff economist.
“At a minimum, the conditions are ripe for a recession,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “When growth slows to less than 2 percent on a year-to-year basis, the economy is simply unable to withstand a major shock or policy mistake.”
One major source of weakness is consumer spending, which accounts for about 70 percent of the economy. Household purchases adjusted for inflation dropped in June for the third consecutive month – the first such occurrence outside of a recession since 1959, according to economists at JPMorgan Chase & Co.
Household sentiment, as measured by the Thomson Reuters/University of Michigan index for July, has receded to a level seen during the last recession.
The Bloomberg Consumer Comfort gauge already is in territory reflective of a slump.
Manufacturing, which helped pull the economy out of the contraction that began in December 2007 and ended in June 2009, is losing momentum. The Institute for Supply Management’s factory index fell last month to 50.9, the lowest since July 2009, from 55.3 in June. Figures less than 50 signal a contraction.
The spread between ISM gauges of new orders and employment turned negative for the last two months in the Tempe, Arizona, group’s manufacturing and service industry surveys. This has happened only three other times in the 14 years overlapping the two sets of data, and a recession ensued in two of those three, according to Credit Suisse.
The probability of a slump in the next six months has soared to 30 percent from 5 percent at the end of July, Credit Suisse’s Basile said. The latest reading contrasts with mid-2010, when economists were concerned about a so-called double-dip. That scare barely registered, as the recession probability was 4 percent at the time, he said.
Credit Suisse bases its forecasts on measures including stock prices, payroll momentum, jobless claims, housing permits, consumer expectations and energy costs.
A 16.8 percent plunge in the S&P 500 index (SPX) over 11 days, in the period to Aug. 8, has occurred just twice without signaling a recession, according to figures going back to at least 1970 from ISI Group Inc. In 1987 and 2002, there was a jump in unemployment claims with a short lag, ISI said in an Aug. 9 report titled “Recession Risk Rising.”
The bond market also is signaling a less-encouraging outlook. The yield on the 10-year U.S. Treasury note has been moving down from 3.77 percent in February and briefly touched a record low of 2.03 percent on Aug. 9 after the Fed’s dimmer assessment of the economy.
The shrinking gap between the 10-year Treasury note and the target for the federal funds rate may be another signal of recession, according to Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. With the benchmark rate on overnight loans among banks stuck at near zero since December 2008, the spread between short-term and 10-year rates has declined in tandem with the falling 10-year yield.
“A narrowing trend in the spread generally indicates weaker economic growth ahead,” he said in a note following the Fed’s statement. “The fact that the spread narrowed this much in such short time under these conditions is a necessary ingredient for the formation of a recession.”
Some regional reports point to a slump in the making. A three-month average of the Federal Reserve Bank of Chicago’s national index of economic activity was minus 0.6 in June. Readings less than minus 0.7 following a period of economic expansion signal an increasing likelihood a recession has begun.
Unemployment is another sign of trouble. If the three-month average of the rate increases by more than three-tenths of a percentage point, the economy has either entered recession or will do so within six months, according to Goldman Sachs Group Inc. Chief Economist Jan Hatzius.
Joblessness, while up from 8.8 percent in March, slid to 9.1 percent in July from 9.2 percent the prior month as discouraged workers left the labor force, so “we’re not there” in terms of the recession criterion, Hatzius says. “But if we were to see further spot increases over the next couple of months, that would definitely be a warning sign.”
He forecasts a one-in-three chance of a renewed recession within the next nine months. The unemployment rate will rise to 9.25 percent by the end of next year, Hatzius said last week, when he cut his growth forecasts through the first quarter of 2012.
[Bloomberg News contributed to this report.]
Related Information in Prosperity View
- Expectations For A Higher Savings Rate May Need To Be Tempered | How Frugal Have We Become?
- Emerging Markets and Commodity Currencies – Roubini Predicts Dollar Drop
- The New Abnormal: Consumer Psychology – Whether to Spend or Save
- Household Spending and Saving Appears to be Finding the Happy Medium
- Cost of Debt: Interest Rates to Remain Low
- At Some Point It Doesn’t Pay to Learn More About Investing: Andy Tobias
- High Unemployment Expected To Keep Interest Rates Low
- How to Borrow and How to Lend – Lessons From The Interest-Only Mortgage
