A US recession in 2012 remains likely

A recession in 2012 is increasingly likely. The US economy continues to expand at close to stall speed, making it highly vulnerable to a myriad of coming economic depressants. Various forms of economic stimulus expire at the end of this year. Consumer income and job growth are nowhere nearly strong enough to sustain the economy's current meagre growth pace, let alone sufficient to withstand the coming economic headwinds.

The sovereign debt crisis in Europe will force a recession throughout the Eurozone. Indeed, there are already signs of a contraction. The EU manufacturing purchasing managers index is down to 46.4, while its services index is down to 46.4. Both below The economic growth Germany may be one of the few exceptions to recession. But, their growth may be limited to a mere 1% next year. The credit and economic contagion effect of the overall eurozone recession will depress economic growth in the US as well as with Europe's other trading partners. Unfortunately, US banks have reportedly issued a huge volume of credit default swaps, which are insurance policies, against the default of European sovereign debt. These insurance policies, which are estimated to be in the hundreds of billions of dollars, would seriously reduce the capital of major US banks if the countries were to default on their debt. Thus, the uncertainty over the outlook will tend to keep the current pronounced bank-lending caution very much in place. It is credit availability and credit flows that determine economic growth, not liquidity.

China has taken various steps to slow its overheating economic growth pace and credit expansion. Off and on control of china's bank lending pace has created pronounced strains and curtailed economic growth. Indeed, China's purchasing manager index fell to 49.0 from 50.4 in October. The Shanghai index declined for the fourth week in a row and is now close to its low for the year. These are indications of an actual decline in China's manufacturing economy, not just a slowing in their growth rate. Moreover, these data have a reputation for being more reliable than their official government statistics. That is slowing growth for China's trading partners. For example, China has announced a pause in major foreign purchases, including, for the time being,an end to china'a purchases of GE's electricity generating windmills.

You might not believe that a US recession next year remains likely, especially given last week's bouyant equity market performance (with the Dow and S&P 500 index up 7%) and the recent array of seemingly stronger economic reports. The equity markets were especially impressed by the strength of retail sales on black Friday, the day after Thanksgiving. That consumer buying performance at the nation's retailers appeared to imply that the US consumer will continue to spend, buoying the economy. However, the extreme bargain prices offered simply accelerated purchases, borrowing from future purchases. The compensating slowing in sales will come next year, probably in January. This would mirror the experience with the Federal cash for clunkers program, which accelerated car purchases into a few months, followed by a compensating slowdown.

The decline in the unemployment rate to 8.6% in November from 9.0% in October was greeted with equity market enthusiasm. But, the reality is that the details of the employment report are far from reassuring. The labor force, which had fallen by 5 million over the last five years,fell by an additional 315,000 in November. This decline in the labor force came despite a 172,000 increase in civilian noninstutional population, which under normal circumstances would have significantly boosted the labor force. However, the decline in the labor force largely reflects an increase in truly discouraged workers, who have just given up looking for work. Thus, the drop in the labor force is an indication of profound economic weakness. If the labor force had not declined in November, the number of those reported as unemployed would have increased to 13,618,000, 315,000 more than the 13,303,000 actually reported.

Other less than optimistic details in the employment report include 0.1% November declines in both aggregate weekly private payrolls and weekly hours worked, and a still weak 120,000 increase in nonfarm payrolls. The U-6 unemployment rate, which includes those who took part-time work because they could not find full-time and discouraged workers,declined to 15.6% seasonally adjusted from 16.2%. But, that is still a very distressed unemployment level. The manufacturing employment diffusion index, which measures the number of firms hiring versus those cutting employment, fell to 49.4 in November from 52.5 in October, and the third decline in the past four months. Thus, more companies are firing than hiring workers. This further undermines the significance of the decline in the unemployment rate and effectively counters a rise in the ISM manufacturing index.

One economic positive often cited is that recessions are relatively rare in Presidential reelection years, obviously because incumbent Presidents have typically had immense power to stimulate the economy. But, next year is likely to prove different. The huge Federal budget deficit, the pressure to reign in government spending, raise taxes and cut the deficit will effectively limit the ability of the President to boost economic growth, even temporarily.

The agreement of the Fed, the European central bank and others to increase global liquidity were taken as a major positive for the equity market. Never fight the Fed is a long standing motto for equity investors. However, the central bank actions do not resolve the European credit crisis. That will require unlikely actions to unify the budget, taxing and spending authority of Europe. The political will for that is lacking. The necessary loss of sovereignty and the loss of special interests, including trimming pensions, salaries, public employment and raising taxes all argue against an effective resolution of the problems any time soon. It is almost inevitable that market disappointment will set in. Perhaps as early as following this coming week's EU summit.

The credit market was not particularly impressed with recent events. In the past it has generally been the credit market, rather than the equity market, that has made the best judgement call in assessing economic and financial prospects. This time is likely to prove no exception. That points to further declines in Treasury bond yields and renewed declines in equity prices as well, as weakness in the US and global economy becomes evident next year. This view may appear out of step with the huge increase in equity prices last week, which reversed the sizable gains the week before. Despite last week's the impressive price gains, this extreme equity market price volitility is itself a market negative.


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

I can be reached at internet explorer by typing in: philipbraverman@gmail.com

This and prior reports can be accessed at philipbraverman.blogspot.com