The risk of the US and global economy falling back into a recession is mounting. It appears ominous that the IBD US proprietary leading economic indicator has just fallen to a new cyclical low, strikingly even below the prior low level reached in December 2007, which foreshadowed the last recession. Other leading indicator series also point to profound economic weakness ahead. That indicates still lower Treasury note and bond yields ahead, even with the S&P downgrading of US Treasury debt to AA+ from AAA, as well as renewed declines in equity prices.
The credit and equity markets began to take the risk of a return to recession far more seriously after the release of the second quarter real GDP report. The markets were disappointed at the 1.3% second quarter real GDP rise. But, far more distressing was the downward revision of the first quarter real GDP rise to a mere 0.4% annual rate, which is only a 0.1% quarterly increase, essentially economic stall speed. Moreover, revisions to prior GDP data also indicated that the recession was deeper and the recovery even more sluggish than previously reported. This was a major catalyst to a sell-off in equities and rally in Treasury note and bond prices.
Treasury note and bond yields declined sharply the past two weeks. The 10-year Treasury note yield fell to a new low of 2.35% before rebounding to 2.56% on Friday. But,that is still well below the relatively recent high of 3.7%. The announcement that the Bank of New York will start charging depositors fees led to a further decline in short term Treasury yields.
In the week before last the sell-off in equities exceeded 4.0% in all the primary stock indicies. As I have pointed out before, a decline in the Value Line equity index in excess of 4.0% in a single week, Friday to Friday, is typically an indication of a trend decline in broad equity indicies. That warrants a complete sellof of equity portfolios and, for the more speculative minded, establishing equity ETF short positions. That would certainly have proven to be a prudent move given that this past week the Value Line index fell an additional 9.6% and the S&P 500 index was down 7.2%, even with a Friday rebound.
The Friday rebound in equity prices and Treasury note and bond yields was due to a gross misreading of the July employment report, which was modestly better than feared, and an announcement that Italy will intensify its budget austerity and that, as a consequence, the ECB will buy Italian bonds. The July official unemployment rate edged down to 9.1% from 9.2%. But that was only due to continued sharp declines in the labor force as more and more discouraged workers give up looking for work. In July the civilian labor force fell by 193,000. That more than offset a 38,000 decline in household survey employment. Expect the unemployment rate to rise over coming months. That prospect seems all the more likely given the horrendous 60% spurt in July in planned corporate layoffs. The help-wanted add index also declined sharply in July. July nonfarm payrolls rose 117,000 after a mere 18,000 rise the month before. Unfortunately, the rise over the two months would have been a decline without a sheer Bureau Labor Statistics guess of hiring by new unsampled business, despite separate reports that indicate new firms are not hiring.
The global problems are compounding. The austerity required in much of Europe, their persistant credit crisis, the significant decline in US consumer confidence, the huge equity market losses, already approaching two Trillion dollars, business and bank caution as well as the contraints on further US Fiscal and monetary stimulus all point to an extremely sluggish global economy and a more than 50% risk of renewed recession.
Philip Braverman, President
Braverman Economic and Fanancial Consulting
One Hewitt Square #249
East Northport New York 11731
This and prior monthly reports can be accessed by going to Internet Explorer and typing in Philp Braverman.Blogspot.com
I can be reached at philipbaverman@Gmail.com
Saturday, August 6, 2011
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