Bank of America/Merrill Lynch: "Growth Recession"
Bank of America/Merrill Lynch: Growth Recession
The growth recession is here
After salami-slicing our forecast in recent months, in the past week we took a deeper cut. We now expect a “growth recession”: we think the economy will manage to post positive headline GDP numbers, but this growth will not be fast enough to keep the unemployment rate from drifting higher.
With business confidence weakening and the economy slowing, we took our 2011 capex forecast down to 7.0% from 12.0%.
And, given the protracted inventory overhang in residential real estate and weaker labor market, we assume a long, even more painful, U-shaped housing recovery.
With below-trend growth we expect the unemployment rate to climb back above 10%. And, while the Fed is clearly not ready to move now, we believe the Fed will launch QE2-a new asset buying program-in Q1 of next year. Our interest rate team expects this to push 10-year yields below 2% in the early part of the year.
Shaving private payrolls
While the bulk of the recent data have been very weak, the most disturbing has been the sharp loss of momentum in private sector employment growth. The key assumption of our old forecast was that a solid pick-up in employment would allow a smooth hand-off between fiscal stimulus and private sector income. This hand-off has looked shaky, and under our new forecast, will look even shakier.
Under the weaker growth trajectory we are now penciling in:
Private payrolls manage tepid monthly gains of just 25,000 through the end of 2010. As the growth recession fades in the second half of 2011, gains in private payroll employment should accelerate. We expect average monthly gains of 125,000 in the fourth quarter of 2011.
Therefore, for most of 2010 and 2011, employment growth is not expected to keep up with the rise in the labor force, which means the unemployment rate heads north. We expect a steady increase to 10.1% by the second quarter with a slow fall slightly below 10.0% by the end of 2011.
A growth, not a double-dip, recession
It is important to underscore that we still do not believe an outright recession - negative growth - is likely. Our main reason for this is straightforward: many sectors that have collapsed have barely recovered.
The three most cyclical sectors-home building, consumer durables and equipment investment-remain near record lows as a share of GDP.
While inventories have stopped collapsing, the inventory-sales ratio remains near its all-time low.
A similar story holds for the job market: during the recession and first two quarters of the recovery, US companies cut jobs and hours much more aggressively than in past major recessions and much more aggressively than in other countries.
The bottom line is that a lot of “lean” has been cut along with the “fat” in the US economy, so it will likely take a bigger than normal trigger to restart the cutting. This trigger could be a big policy mistake and/or an exogenous shock to the economy. We put the odds of a double-dip recession in the next year at 25%, slightly above the historical average.
FULL (PDF)
The growth recession is here
After salami-slicing our forecast in recent months, in the past week we took a deeper cut. We now expect a “growth recession”: we think the economy will manage to post positive headline GDP numbers, but this growth will not be fast enough to keep the unemployment rate from drifting higher.
With business confidence weakening and the economy slowing, we took our 2011 capex forecast down to 7.0% from 12.0%.
And, given the protracted inventory overhang in residential real estate and weaker labor market, we assume a long, even more painful, U-shaped housing recovery.
With below-trend growth we expect the unemployment rate to climb back above 10%. And, while the Fed is clearly not ready to move now, we believe the Fed will launch QE2-a new asset buying program-in Q1 of next year. Our interest rate team expects this to push 10-year yields below 2% in the early part of the year.
Shaving private payrolls
While the bulk of the recent data have been very weak, the most disturbing has been the sharp loss of momentum in private sector employment growth. The key assumption of our old forecast was that a solid pick-up in employment would allow a smooth hand-off between fiscal stimulus and private sector income. This hand-off has looked shaky, and under our new forecast, will look even shakier.
Under the weaker growth trajectory we are now penciling in:
Private payrolls manage tepid monthly gains of just 25,000 through the end of 2010. As the growth recession fades in the second half of 2011, gains in private payroll employment should accelerate. We expect average monthly gains of 125,000 in the fourth quarter of 2011.
Therefore, for most of 2010 and 2011, employment growth is not expected to keep up with the rise in the labor force, which means the unemployment rate heads north. We expect a steady increase to 10.1% by the second quarter with a slow fall slightly below 10.0% by the end of 2011.
A growth, not a double-dip, recession
It is important to underscore that we still do not believe an outright recession - negative growth - is likely. Our main reason for this is straightforward: many sectors that have collapsed have barely recovered.
The three most cyclical sectors-home building, consumer durables and equipment investment-remain near record lows as a share of GDP.
While inventories have stopped collapsing, the inventory-sales ratio remains near its all-time low.
A similar story holds for the job market: during the recession and first two quarters of the recovery, US companies cut jobs and hours much more aggressively than in past major recessions and much more aggressively than in other countries.
The bottom line is that a lot of “lean” has been cut along with the “fat” in the US economy, so it will likely take a bigger than normal trigger to restart the cutting. This trigger could be a big policy mistake and/or an exogenous shock to the economy. We put the odds of a double-dip recession in the next year at 25%, slightly above the historical average.
FULL (PDF)