MacroScope

It’s become an uncanny, almost seasonal pattern over the last few years: The economy perks up as a new year kicks into gear only to flail again by the time summer comes around.

It must be that time of year. A very weak U.S. retail sales report for June forced economists to again take an axe to their already meager forecasts for economic growth this year. Stephen Stanley at Pierpoint Securities, suggests the figures are beginning to dip dangerously close to contraction.

I have been near the bottom of the range of estimates on Q2 GDP for the last month or two and it seems like we are all chasing the data lower. Before today, I had about 1% for Q2 real GDP. The awful retail sales figures coupled with somewhat higher-than-expected inventories tally takes me down to +0.6%.

As you can see, I am running out of room with regard to being above zero! I think the consensus was a little over 1½% before today.  I’ve seen some low 1%’s this morning, so I think I remain about ½% below most other estimates.

Stanley sees things staying bad in the second half of the year as well.

The economy has downshifted from muddling to near-stagnation. […]

Given how weak the consumer appears to be after today’s numbers, I am slashing my Q3 numbers as well. A week ago, I was thinking close to 2% for Q3. Now, I have about 1¼%, with most of the downward adjustment occurring in consumer spending.

Federal Reserve Chairman Ben Bernanke “might have something up his sleeve next week” when he delivers his semi-annual monetary policy report to Congress: he could hint at a “funding for lending” program similar to what the Bank of England announced last month, according to one long-time Fed watcher.

If the Fed wants to ease again, the first lever they pull might not be more quantitative easing where the Fed buys government bonds to help keep interest rates low in the hope that low rates will foster lending and economic growth, says  Decision Economics economist Cary Leahey.

Bernanke is scheduled to testify before the Senate Banking Committee on Tuesday and in front of the House Financial Services Committee on Wednesday.

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.

It’s an arcane economics debate with all-too-real implications for U.S. monetary policy: Is high unemployment primarily the result of “structural” factors like skills mismatches and difficulties relocating, or is it largely due to insufficient consumer demand in a weak economic recovery?

The answer to that question may help determine how much further the Federal Reserve is willing to push its unconventional measures to bring down the jobless rate, currently stuck at 8.2 percent. If unemployment is cyclical, economists say, it would be more likely to respond to looser monetary conditions.

Research from Berkeley professor Jesse Rothstein, published earlier this year and featured recently on the National Bureau of Economic Research’s website, represents one of the most thorough academic efforts to date to discredit the structuralist version of events.

Markets were a little unnerved yesterday by concern that Germany’s top court may take a long time to rule on complaints lodged against the euro zone’s permanent bailout fund, the ESM, which was supposed to come into effect this week. Finance Minister Schaeuble urged the constitutional court to reach a speedy decision. The judges are not expected to block it but Germany’s president says he won’t sign it into law without the court’s go-ahead. A minor delay will pose no problem. A lengthier one could jolt investors.

The head of the court raised the possibility of a review taking take two to three months. That could create a dangerous vacuum though he stressed that was just one option. Schaeuble is just out again saying he hopes for a verdict before the autumn.

Bundesbank head Weidmann said even rapid ratification may not stop the crisis escalating further. With only a maximum 500 billion euros (100 billion of which is earmarked for Spain’s banks) at its disposal, the ESM looks ill-equipped to tackle the bond market head on. When the European Central Bank intervened last year to lower Italian borrowing costs it was spending 13/14 billion euros a week. And even then, it bought only temporary leeway.

For three decades at least, the U.S. labor market has been stretched toward higher- and lower-skilled jobs, leaving fewer opportunities for those in the middle. This “job polarization” has benefited high-skilled sectors like engineering, computer science and finance on one hand, and low-skilled sectors like farming, health support and building maintenance on the other, according to a study by New York Fed researchers. In the middle – where the majority of Americans work in areas such as education, construction, administration and transportation – job growth since 1980 has badly lagged.

Between 1980 and 2010, high skilled job growth was 101 percent, while low-skilled job growth was 91 percent, the researchers found. Growth among “upper middle” jobs (community service, precision production, etc) was 46 percent over that time, while growth among “lower middle” jobs (machine operation, sales, etc) was only 20 percent. Proportionally, the pattern sharply reduced the largest segment of the workforce – the “lower middle” skilled – mostly because of technology and off-shoring of jobs that require less face-to-face contact than, say, lawyers (high skilled) or personal caregivers (low skilled).

Digging deeper into the numbers, the polarization pattern appears to have held through the Great Recession, with one interesting exception: the low-skilled sector was the only one of the four to actually grow. Jobs in that category, which make up roughly 16 percent of the U.S. workforce, grew by 1.2 percent from 2008 to 2010, while high (-2.3 percent), upper middle (-6.5 percent) and lower middle (-8 percent) all fell. Chalk it up as another quirk in a recession that has transformed the labor market in ways we’ve yet to fully grasp.

Euro zone finance ministers meet later today to try and put flesh on the bones of the EU summit agreement 10 days ago. The trouble is there probably won’t be enough meat for markets which failed to rally significantly after the summit deal and are now unnerved by fresh signs of global slowdown.
Friday’s weak U.S. jobs report is the latest evidence to rattle investors so there is unlikely to be any let-up.

Spanish 10-year yields are back above seven percent. Madrid is fortunate not to face a heavy debt issuance month but August is a bit more demanding so time is short to turn things around. Italy’s Mario Monti said on Sunday the euro zone ministers must act now to lower borrowing costs and Spanish Prime Minister Mariano Rajoy more dramatically said the credibility of the entire European project rests here. He continues to do his bit, pledging on Saturday to produce further deficit-cutting measures, probably on Wednesday. They could include a VAT hike and cuts to public sector benefits.

The Eurogroup is unlikely to dramatically change the terms of trade. It has a lot on its agenda – the proposed bailout of Spanish banks of up to 100 billion euros, a much smaller bailout of Cyprus as well as firming up the summit agreement that the euro zone’s rescue fund should be tasked with intervening on the bond market to bring borrowing costs down and, once a cross-border banking supervision structure is in place (another highly ambitious plan which is supposed to take shape in an even more ambitious six months), to be allowed to recapitalize banks directly.

The past year of forecasting U.S. payroll growth marks a bumpy road of U-turns on the timing of an elusive turning point to sustainable recovery, an analysis of Reuters polls shows.

In early 2011, an overwhelming majority of economists — 48 of 52 in the April poll and 38 of 46 in the May poll — said that turning point already had been reached.

More than a year later, it still seems a way off.

The U.S. economy added jobs at a monthly rate of 165,000 so far in 2012, far short of the 200,000 most say is representative of strong growth in a recovering economy.

Bit of a day coming up with the European Central Bank topping the bill. A quarter-point interest rate cut is widely priced in and the bank may also lower its deposit rate to try and encourage the banks that dump up to 800 billion euros back in its coffers every night to invest it in the real economy or even Italian and Spanish government bonds.

There is even some talk of a third round of three-year money printing but that looks premature. Yes, the ECB has acted in the past after euro zone politicians have shown some gumption (which last week’s summit still just about qualifies for) but the other part of that equation is that the currency bloc has had to be right on the brink. Spanish 10-year yields are back below 6.5 percent, still too high but not as acute as in recent weeks. There are not likely to be any hints that the ECB will revive its bond-buying programme, despite the urgings from Spain and Italy, nor is it likely to give any support to the idea of giving the ESM rescue fund a banking licence so it can borrow virtually unlimited funds from the ECB (a back door way of achieving the same result).

The risk for the markets is that the ECB does very little, which should not be discounted, and even if it does there’s a possibility of a “buy the rumour, sell the fact” scenario.

Ellen Freilich contributed to this post

The Fed did the twist. Will it shout as well? There has been some debate among economists about whether the U.S. central bank might launch a third round of outright bond buys or QE3 given that it just prolonged Operation Twist.

But a truly grim report on the U.S. manufacturing sector from the Institute for Supply Management, if coupled with further evidence of a deteriorating labor market, could certainly induce policymakers to press their foot to the monetary accelerator.

Not only did the index slip below 50 in June, pointing to a contraction for the first time in three years, but the reading of 49.7 was lower than the lowest forecast in a Reuters poll of economists. Moreover, the subcomponents showed the biggest drop in new orders since the aftermath of the Sept. 11 attacks in 2001.