US is vulnerable to a European recession and asian slowdown

Though there have been further indications that the US recovery is gaining traction, there are realistic doubts that this progress will be extended. Moreover, there are special reasons for this mere appearance of a strengthening economy. And, even more significant, the economy will soon run into difficult headwinds that will cause it to at least slow and quite possibly slip back into recession.

The fourth quarter real GDP was up 2.8%, after a 1.8% rise in the third quarter. But, much of the fourth quarter rise was merely due to a temporary 1.9% rise in inventories. That may largely be due to the realization that the "just in time" inventory control system can no longer be depended on in view of the string major supply disruptions due to the Japanese earthquake and Sunnami and the Thialand floods. Without that inventory rise, fourth quarter final sales were up a minicule 0.8%. But, even that slim rise was inordinately boosted by the ending in the fourth quarter of the 100% write off of business investment. Automotive purchases alone accounted for 0.3% of the 0.8% fourth quarter final sales.

The unemployment rate declined to 8.3% in January from 8.5% the prior month. Nonfarmpayrolls also appeared stronger with a 243,000 rise. But, the realty is that the January seasonally-adjusted rise is entirely due to the seasonal ajustment that turned a 2.7 million nonfarm payroll decline into a 243,000 seasonally adjusted increase. While the January decline before seasonal adjustment was smaller than in recent January's, that reflects the smaller seasonal end-of-year pre-holiday hiring and the warmer than normal January weather that permitted a contraseasonal rise in construction employment.

The credit and equity markets have reacted to the appearance of somewhat stronger US economic reports as convincing evidence that the risk of a US economic retreat has significantly receded. But, that view does not take into consideration either a renewed sluggishness or worse in the US as recent strength disapates or the adverse impact of the contagion effect from the outright recession that is bound to occur in Europe, if it has not already commenced, and the slowdown in China and much of the rest of asia. The major shift to austerity, the required prescription for reversing the excessively indebted southern tier of European countries, including Portugal, Spain, Italy and Greece, will plunge the entire continent into an almost inevitable recession. The economy in China is slowing. This is due to a deliberate effort on the part of the government to reign in the excessive speculation in real estate and slowing sales to Europe and much of the rest of Asia. Japan's economy, for example, already appears to be contracting. The leadership in China is scheduled to change this year. That precludes any new stimulus any time soon even if a hard landing is feared. While the official China manufacturing purchasing managers index, which measures large firms,is still positive, the HSBC purchasing managers index, measuring small manufacutring firm activity, indicates a contraction in this sector in China.

Based on this analysis, the recent rise in US Treasury bond yields will be reversed and then some. I am still looking for new lows in Treasury bond yields. As it becomes clear that the global economy is slowing,the demand for commodities in general will also slow. That is also likely to erode confidence in equities.

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

I can be reached at philipbraverman@gmail.com

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