Gavyn Davies Says: Double Dip
Davies:
US economy is slowing more than the Fed has recognised: I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve... the pick up in more sustainable sources of growth, notably consumers’ expenditure and capital investment, has so far been more anaemic than I had hoped, and the improvement in the labour market may be going into reverse. The Fed may soon be forced to confront the choice they most wanted to avoid, which is whether to extend quantitative easing, instead of allowing their programmes of unconventional easing to lapse, as they fervently hoped earlier this year. As recently as last week, the FOMC suggested that it had reduced its growth projections, but it still expected resource utilisation to rise, implying that GDP growth would be maintained above the 2.5 per cent trend into 2011. This sanguine view of the economy seems increasingly difficult to maintain....
[T]he straws in the wind for Q3 are not very encouraging. The first graph shows the results of the New York and Philly Fed Surveys for August, along with the ISM Manufacturing Survey up to July. The Fed surveys suggest that the ISM survey may drop quite sharply when it is published on 1 September, perhaps to somewhere in the low 50s, compared with recent healthy readings of around 55. This indicator is widely watched, and it could trigger a major rethink about the strength of the economy. So too could the monthly US employment numbers, which are due to be published on 3 September. Initial claims for unemployment benefit have been rising ominously in recent weeks....
Previously optimistic private sector forecasters have been downgrading their central case, and the danger of a double dip is coming onto the radar screen.... No-one yet makes a double dip the most likely course of events in the US. But this is not very surprising, since economic forecasters almost never acknowledge the start of a recession until some months after it has actually taken place. Instead, they talk about “increased risks of recession”. It is interesting to note that both JP Morgan and Goldman Sachs now say that a double dip recession is about 25-30 per cent probable, which is what forecasters generally say when they are becoming really concerned that such an outcome could easily occur...
