MacroScope

In Jackson Hole, where central bankers and leading economists from around the world are gathering for an annual meeting hosted by the Kansas City Fed, the talk is about the economy, what Fed Chairman Ben Bernanke will signal in his highly anticipated speech on Friday and what Warren Buffett’s purchase of a stake in Bank of America might mean for the beleaguered bank.

Here’s a smattering from interviews on the sidelines of the meeting, which begins in earnest with a formal dinner tonight:

– “QE3 is not in the cards, so don’t expect that,” Bank of America economist Mickey Levy told Reuters Insider, referring to the possibility of a third round of bond-buying by the Fed. Instead, the Fed may aim to reduce long-term rates by replacing some of the shorter-term securities in its portfolio with longer-term assets, he said.

– John Silvia, an economist at Wells Fargo Securities, said such a step would be a “small move,” and suggested that with three dissenting votes on the Fed’s policy-setting panel Bernanke would be more likely to go slow than fast. “Three dissents do matter,” he said.

– Carnegie Mellon professor and Fed historian Alan Meltzer, who has attended nearly every annual Jackson Hole meeting since its inception 29 years ago, suggested there’s about as little Bernanke can do about the economy as about the torrential downpour that drenched the mountain valley minutes before his interview.

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
“The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting,” Goldman says, adding: “The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn.”

Phew. Industrial production rose 0.9% in July, the fastest in seven months. For the moment, that appeared to forestall fears that another U.S. recession  might be imminent, even if stocks were down on worries about weak economic growth in Germany. Harm Bandholz at Unicredit saw the figures as a bright spot:

Today’s report, in combination with the recent improvements in initial jobless claims and retail sales, corroborates our view that GDP growth in the second half of the year is likely to accelerate to (a still low) 2%-2¼% from less than 1% in the first half.

Economists at Credit Suisse were less sanguine:

The July industrial production performance is not consistent with recession.  But industrial production tells us where we are, not where we are going.

The chances of a second U.S. recession are rising. But just how high a probability is always difficult to gauge. The latest Reuters consensus from private sector economists – most employed by an industry that got us into the mess – is currently one in four. That’s not very high, but it has crept up from one-in-five when we asked the same people two weeks ago.

In the meantime, the U.S. has done what many would never have thought possible – it lost its AAA sovereign debt rating from Standard & Poor’s, thanks to an acrimonious political debate over the debt ceiling and, in S&P’s judgment, inadequate legislation to tackle deficits over the long-term. Global stock markets have plummeted 20 percent since May, racking up staggering losses over the past few days, rattled by that U.S. rating downgrade, worries about a world economic slowdown, and a spiralling euro zone debt crisis that now is lapping at the shores of a G7 country — Italy.

The fact it’s been too long since the Great Recession technically ended to call any new recession a “double-dip” shows just how dire the situation is. Nouriel Roubini, known to most as “Dr Doom” for talking down the U.S. economy through bubble years but getting the call right on the last recession, is one of the few who have already called the next one.

So much for jobs being a lagging indictor. Economists at Goldman Sachs have constructed a handy little model for predicting recessions based on increases in the unemployment rate. We’ll let them explain the details in their own words, but here’s the short of it: If the jobless rate ticks up to 9.3 percent in July from 9.2 percent in June, then stays there in August, the U.S. expansion is toast:

Technically, the “rule” is as follows: if the three-month average of the unrounded unemployment rate increases by more than three-tenths of a percentage point (35 basis points to be exact) from a trough, the economy has either entered recession already, or will do so within six months. The intuition behind this statistical regularity is that if the labor market stalls for more than a short period, a vicious cycle of weaker income growth, weaker spending, and weaker hiring typically results. An important exception is in the early phase of economic recovery, when the unemployment rate often continues to drift higher for several months.  Currently, the three-month average rate is 9.07%, up from a recent trough of 8.90% in April. The unemployment rate would need to increase to 9.3% in July and stay there in August to trip the 35-basis point threshold; our forecast for Friday’s July labor market report is that the unemployment rate will remain steady at 9.2%.

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.

In the last comparable recession, which we know wasn’t anywhere near as deep as the Great Recession just endured, U.S. jobless claims peaked at 695,000 in October 1982.

Weekly initial unemployment claims is an extremely reliable leading economic indicator because the figure is not derived from a survey. It’s an actual tally of real people without a job who are queuing up for the dole.

By the end of the following year, about 14 months later, weekly initial unemployment insurance claims had plunged by more than 300,000 to 372,000. They dipped even further to 333,000 in January 1984.

Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.

With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.

Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.

U.S.  and Japanese monetary policy does not always move hand in glove, but meetings of  the countries’ respective central banks in the next few days are likely to spell out the same thing — that the job of economic recovery is by no means over.

It is almost a dead cert that the Federal Reserve will keep interest rates where they are and a high probability that it will renew its view that we can expect an “extended period” of  ”exceptionally low” rates. It is likely to stick to its plan to end purchases of around $1.7 trillion in assets. But it could well leave the door open for a renewal of purchases at a later date should economic expansion fall back.

The message: Mission not yet accomplished.

The Bank of Japan may prove even more dovish. It is under pressure to get even looser than it already is, most likely by increasing funds offered under its lending operation.  This is partly because of weakening price trends and worse fourth quarter growth than expected.

After financial firms slashed hundreds of thousands of jobs in 2007 and 2008, the bloodletting slowed in 2009 as major banks rebounded from the financial crisis. Even though firms like Goldman Sachs Group Inc and JPMorgan Chase & Co reported billions of dollars in profit, they still did not announce major hiring initiatives.

Recession layoffs Headcount (end 2008) Headcount (end 2009) Bank of America 45,000 240,202 283,717* Citigroup 75,000 323,000 265,000 Goldman Sachs 4,800 34,500 32,500 J.P. Morgan 23,700 224,961 222,316 Morgan Stanley 8,680 45,295 61,388* UBS 19,700 77,783 65,233 Credit Suisse 7,320 47,800 47,600 Barclays 9,050 152,800 144,200 Deutsche Bank 1,380 80,456 77,053 Santander 2,600 170,961 169,460

* Includes additional employees from Morgan Stanley Smith Barney merger and Bank of America’s merger with Merrill Lynch, both of which were completed in 2009 (Steve Eder and Steve Slater)