MacroScope

D-day averted, R-word looms

August 2, 2011

The United States appears to have averted a default with a theatrical last-minute agreement to raise the debt ceiling. But it must now grapple with what appears to be the growing threat of a new recession. Consumer spending contracted for the first time in two years in June. At the same time, manufacturing grew at its weakest pace in two years in July, suggesting the third quarter has not gotten off to a very good start.

Economists in a Reuters poll expect only 85,000 new jobs were created in July, a forecast that may be optimistic given that the threat of default loomed over the economy for much of the month.

Research notes from Wall Street economists were still studiously avoiding the word recession, but the evidence was becoming harder to ignore.

Jonathan Basile at Credit Suisse, describing Tuesday’s report on personal spending:

The monthly profile (-0.1% Apr, -0.1% May, 0.0% Jun) revealed consumers at stall speed in each month of the quarter. And the best consumers could do in June was flat — even with gasoline prices falling. Consumers got some purchasing power back, but did not decide to spend it.

David Hensley at JP Morgan, which started the year with a bullish outlook:

It is tempting to attribute the weakness in the (global manufacturing surveys) to concerns over the sovereign debt crises roiling the euro area and the US. This is no doubt giving pause to some busenesses. However, the breadth of the softness in the PMIs in July is likely more attributable to the weakness in global demand. … The large step down in the employment PMI in recent months is perhaps the most concerning development in the business surveys.

Christopher Low, chief economist at FTN Financial, adequately captured the mood. While many economists still believe the expansion will be sustained, few are banking on a vigorous bounceback anymore.

The robust second-half recovery that people were talking about a couple of months ago is not realistic.

 

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