Staring Down The Barrel of a Double Dip Recession
Markets & respected economists are now ratcheting up their concern that the US, if not world economy, is falling into a new recession.
~Excerpts/Recommended Reading from August 2, 2011~
CNBC
Dow Logs 8-Day Loss, S&P Negative for Year
Stocks sold off sharply to end at session lows Tuesday with the Dow down for an eighth day amid economic worries and even after President Obama signed a bill to avoid a debt default.
The Dow Jones Industrial Average plunged 265.87 points, or 2.19 percent, to end below the psychologically-important 12,000 mark at 11,866.62. The last time the blue-chip index declined for eight-consecutive days was in October 2008...
Bloomberg
Market Erases 2011 Gains on Concern of Recession Return
Stocks tumbled as the Standard & Poor’s 500 Index had its biggest one-day loss in a year and erased its 2011 gain, while Treasury yields fell to the lowest levels since November, after an unexpected drop in consumer spending added to concern the economy will slide into a recession. Gold and the Swiss franc rallied.
The S&P 500 fell 2.6 percent to 1,254.05 at 4 p.m. in New York, dropping for a seventh straight day in its longest slump since 2008...
CNBC
Personal Spending Down 0.2% While Income Growth Slows
U.S. consumer spending dropped in June for the first time in nearly two years as incomes barely rose, suggesting economic growth could remain subdued in the third quarter...
Bloomberg
Recession Panel Majority Sees Rising Odds of a Renewed U.S. Economic Slump
The odds of another U.S. downturn are rising amid cutbacks in spending by consumers and the government, according to five of the nine members of the U.S. panel that dates recessions.
“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”
A greater-than-expected slowdown in the first half of 2011 poses risks for the world’s largest economy, said economist Robert Hall of Stanford University, the panel’s chairman. Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29.
“The slower the growth rate, the more likely it is that an adverse shock would cause a recession,” Hall said in an interview...
Committee members cited weakness in housing, employment, and business confidence and efforts to reduce debt by consumers and government as hurdles to growth. Four academics on the panel either declined give odds of a recession or didn’t respond to requests for comment...
“We certainly are in a more vulnerable situation now,” and a new shock could spark a downturn, similar to the contraction after oil prices jumped with Iraq’s invasion of Kuwait in 1990, said James Stock, a Harvard economist on the NBER panel. “Looking around the world, it is sure possible to think of shocks of the Kuwait magnitude that could tip us over the edge.” ...
Cutbacks in government spending will be a drag on growth next year, said Jeffrey Frankel, another Harvard professor on the NBER committee. While recession risks have risen, they are “not necessarily enough to push the probability over one half.”
Stimulus Withdrawn
“The government is a source of contraction this year,” Frankel said. “Fiscal stimulus is being withdrawn at the federal, state, and local levels.”
Committee member Robert Gordon of Northwestern University, who didn’t estimate odds on a recession, and Feldstein agreed that the “hangover” from the housing bubble continues to plague the economy.
“There is a vast oversupply of housing that has crushed any chance of recovery of residential construction, which for the last three years has been operating at about 25 percent of the housing starts registered in 2005-06,” Gordon said.
Bloomberg
Debt Agreement Puts U.S. on Path to End Stimulus Just as Economy Falters
The federal government looks to be getting out of the business of trying to spur the economy just as the U.S. expansion shows increasing signs of faltering.
A deal struck over the weekend to cut $2.4 trillion or more off budget deficits over a decade marks the beginning of a prolonged effort to put the government’s finances into better shape. While the immediate economic impact from the agreement is likely to be small, it will add to a reduction in growth next year of 1.5 percentage points coming from the expiration of past stimulus programs, according to economists at JPMorgan Chase & Co. and Deutsche Bank Securities.
“Over the next 10 years, there will be further spending cuts and higher taxes, and that’s not good for economic growth,” said Paul Dales, senior economist for Capital Economics Ltd. in Toronto. “It is the start of a meaningful move toward fiscal consolidation.”
The shift from stimulus to austerity coincides with a slowdown in the two-year recovery. A report last week showed that gross domestic product grew at an annual rate of 1.3 percent in the second quarter of the year following 0.4 percent in the first three months, prompting economists to warn of possible relapse into recession.
The economy will suffer another blow next year with the expiration of a temporary 2 percent payroll tax cut, an end to extended unemployment benefits and completion of the $830 billion stimulus program that President Barack Obama signed into law more than two years ago. Obama will press Congress to extend a cut in payroll taxes before the end of the year, White House press secretary Jay Carney said yesterday...
CNBC
Europe on Brink of 'Major Financial Collapse': Guggenheim CIO
Europe is a "train wreck" and on the "brink of a major financial crisis," Scott Minerd, CIO of the fixed-income firm Guggenheim Partners, told CNBC Tuesday.
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"The way Europe is operating right now, it's what I called recently 'cognitive dissonance,'" Minerd said, or "basically doing the same thing thinking they're going to get a different outcome."
"They keep throwing more and more liquidity at it thinking it's going to get better and it's not," he added. Europe fails to recognize that it has a "structural problem, not a liquidity problem."
People will "flee the euro" unless they find a way to bifurcate the euro in some way where strong countries are in the euro only and the weak countries are out, Minerd explained, adding, "To be honest with you, I don't see the mechanism to do that." ...