A US and global recession is increasing likely

The risk of a coming US and global recession is mounting. Europe is already entering a recession, perhaps quite severe. China's economy is at least slowing significantly, with a harder landing than widely anticipated possible. That combination,together with weakness in commodity producing countries, promise a global recession from which the US will not be immune. Indeed, continued weakness in US employment, together with other evidence of growing US economic vulnerability, makes that recession risk amply clear. And that recession risk does not even take into account the fiscal cliff of mandated sharp increases in taxes and cuts in spending at the beginning of next year. The fiscal cliff is equal to between a 3.0% to 4.0% depressant in real US GDP. That is clearly a very substantial growth depressant for an economy with real GDP growing between 0.5% and at most 2.0% currently. However, the US equity market and, to a considerable extent, the credit market are still willing to view the US economy as in merely a soft patch, from which it will soon recuperate. But decidedly adverse economic reports and developments ahead will very likely turn the mere recession risk into an all too unpleasnt reality. Some US economic data are already disappointing. The Purchasing Managers index declined to 49.7 in June from 53.5 the month before, possibly already indicating an economic contraction in manufacturing. The small 80,000 seasonally-adjusted June increase in nonfarm payrolls follows equally small revised increases of 77,000 in May and 68,000 in April. While these are increases, not declines-at least not yet, the employment rise does not even compensate for the trend rise in the labor force. That is why the unemployment rate appears stuck at 8.2%. But it is likely to soon be rising. As if this sluggish June employment growth reality were not bad enough,the entire 80,000 rise in June nonfarm payroll employment may actually be fictional. This is because 100,000 was added to total employment estimates to reflect the merely assumed hiring by new companies that are too new or small to be sampled. The recent pace of seasonally-adjusted nonfarm payroll increases, 75,000 on average the past three months, is less than one-third the pace of nonfarm payroll employment gains that should be expected at this point in the expansion, assuming of course that this was a typical cyclical recovery from a typical recesssion. Unfortunately, this is not a typical recovery because the recession that preceded it was far from typical. The recession was due to the bursting of an excessive credit bubble that threatened the US and the global economy with a financial collapse. The deleveraging process from that near miss is still far from complete in the US and especially in Europe. Indeed, the risks of a renewal of financial problems centering on European soverign debts and the capital adequacy of European banks, overburdened with suspect assets, are very much still in the forefront of the European credit crisis. And the contagion risk for US financial institutions should not be minimized. So far, the proposed official solutions to Europe's problems are essentially attempts to merely paper them over. Too many of the European nations in the southern half of the continent have been living beyond their means. They have borrowed excessively to pay for transfer payments that should have been funded by taxes. And too many of the distressed nation's banks have purchased the questioned sovereign debts. The credit market is increasingly unwilling to continue the process of buying the sovereign debts of the troubled countries. There is also a capital flight, especially from the threatened banks. Throwing even more credit support from the more prudent northern Europen nations to backstop the imprudent southern European nations will in time only bring them all into question. There is no unified tax base for the Eurozone, as there is for the US. The US is far from prudent, but that difference in the form of a unified taxing authority makes all the difference. A true confederation of the states of Europe, with a single government and taxing power, would resolve the crisis. Without anything approaching that step the crisis threatens to persist, at least until the problem countries leave the Euro. Coming back to the US, the recent Supreme Court decision upholding the legality of questioned aspects of Obamacare has for the time being removed one major source of uncertainty in the business outlook that had tempered business willingnes to hire and invest. Unfortunately, there are too many other negatives or uncertainties that limit business confidence to expect a stepup in capital spending or employment gains any time soon. The financial implications of this outlook include a decline in commodity prices, a further slowing of inflation(termed disinflation),a further decline in Treasury bond yields and, when the recession is more evident, a decline in the prices of equities whose business prospects are seen as especialy vulnerable to the cyclical downturn. Investor emphasis will be on the so called defensive equities, long term growth stocks and safe dividend payers. The Treasury 30-year bond yield at 2.66%, down from 2.76% the week before, is destined to decline much closer to 2.00%, as investors rush to "safe havens". The maturity yield-spread between the 10-year Treasury, now 1.55% and the 30-year Treasury, will narrow significantly. This maturity yield spread is currently 1.11% (2.66% minus 1.55%). It may well decline towards .50%. That will mostly benefit high-grade bond prices (AA). But, it will also somewhat benefit through to the bottom of investment-grade bond prices (BBB-). Philip Braverman, President Braverman Economic and Financial Consulting One Hewitt Square, #249 East Northport, New York 11731 This and earlier reports can be accessed by going to Internet Explorer and typing in philipbraverman.blogspot.com I can be reached at philipbraverman@Gmail.com.