US economic growth has stalled at the brink of a new recession

The August employment report triggered a further decline in Treasury and other credit market yields as well as a sell-off in equities.

The yield on the Treasury 10-year note fell to 1.99% on Friday, down from from 2.22% on Wednesday. The yield on the Treasury 30-year bond fell to 3.30% on Friday, down from 3.61% just two day earlier. Not only have these yields been declining, but the yield spread (the difference between the 10-year and 30-year yields) has also been declining. In just the last two days the Treasury yield spread declined to 131 basis points(or 1.31percentage points) from 139 basis points on Wednesday. High-grade corporate and municipal note and bond yields have also been declining. All these various yields and yield spreads are destined to decline further.

Third quarter real GDP growth is shaping up to be essentially zero, even weaker than the revised 1.0% second quarter slight rise and the almost flat 0.4% first quarter increase. As there is additional evidence of the sputtering economy, yields will decline further. The yield spread between 90-day Treasury bills, which already yields barely above zero, and the 10-year, is likely to narrow to 125 to 150 basis points. That suggests a coming 10-year yield low of between 1.25% and 1.50%, down from the current 1.99%. The 30-year Treasury yield could decline to between 2.00% to 2.5% from the current 3.3%. Even a one half percentage point decline in the 30-year yield would produce a 15% rise in the price of the bond. That would of course boost the prices of high grade corporates, such as AA rated GE bonds, and municipals.

The Federal Reserve is likely to reinforce the trend to lower Treasury bond yields by lengthening the maturity of their Treasury security purchases. This would be an operation twist designed to bring down bond yields to help stimulate the economy. Market expectations of this not yet announced possibility were enough to slightly raise 2-year Treasury yields.

August nonfarm payrolls were unchanged, a major disappointment, especially after downward revisions in prior months to payroll increases of only 85,000 in July and 20,000 in June. That is an average monthly increase of merely 35,000 the past three months. That is certainly not reversing the recession decline in employment, let alone creating jobs for new entrants into the labor force, including new graduates and immigrants. To accomplish that, the monthly increases should be well over 200,000. But to make mattters worse, the reported monthly nonfarm payroll increases are grossly overstated because they include a sizable increase attributed to assumed hiring by unsampled new businesses. However, there is good reason to believe that, in reality, new businesses are not significantly hiring.

Other elements of the August employment report were also bleak or even ominous. The official unemployment rate remained unchanged at 9.1%. But the U-6 unemployment rate (which includes discouraged workers and those working part-time because they could not find full-time employment) edged up to 16.2% from 16.1%. Average hourly earnings declined 0.1% and the average workweek also edged down 0.1%, both significant negatives for the US economy.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

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