MacroScope

Goldman recession-meter flashes yellow

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%.

 

D-day averted, R-word looms

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.

The U.S. jobless recovery: some context

jobless.jpgIn 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.

Slowing growth, MPC splits? That’s so 2008

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.

INDONESIA/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.

Mission not accomplished at central banks

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.

Financial headcounts stabilize in 2009

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)

A grand bargain to solve global imbalances

Michael Pettis, a professor and China expert at the Carnegie Endowment for International Peace, has put together a thorough and informative look at all things U.S.-China trade. It’s well worth reading and watching the entire thing, but here’s a few highlights that jump out:

* We’re likely to see a significant increase in global trade tensions

* China will probably allow the renminbi currency to rise, but not by a lot

* There is a way to resolve those huge global imbalances but it will be painful and the chances of mustering the political will — in China, the United States and Europe — look slim.

A bit more on that last point: Pettis thinks that those three players need to “come to some kind of grand agreement.”

from UK News:

Has Alistair Darling done enough to revive Labour’s electoral hopes?

So how was it for you?

Chancellor Alistair Darling threw the dice in his pre-budget report in an attempt to bolster Labour's chances of winning the general election in 2010.

From hitting bankers with a one-off bonus tax to lowering bingo duty, Darling played to the Labour heartlands, while hoping to win back voters who have been telling pollsters that they are done with Gordon Brown.

Other measures included the return of full value added tax in January, a 2.5 percent rise in the basic state pension, a 1.5 percent increase in child benefit, as well as help for small businesses and various initiatives to boost the government’s green credentials.

Chicago and the toddlin’ recovery

It may not get as much attention as the monthly employment report or GDP figures, but the U.S. Federal Reserve Bank of Chicago’s gauge of the national economy has a good track record of distinguishing economic expansions from recessions. And it’s suggesting that the U.S. recovery may be wobbling.

Over at the econbrowser blog, economist James Hamilton points us to a recent research paper that examines how accurate the various economic indicators are at telling us when the economy is growing or contracting. The Chicago Fed’s national index was one of the best. And Monday’s report shows it faded in October.

Not only that, but its three-month moving average fell to -0.91 in October from -0.67 in September, declining for the first time in 2009. That drop was especially significant because the Chicago Fed says a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun.

from Route to Recovery:

Learning to live with less, and appreciating it

ROUTE-RECOVERY/

BELLA VISTA, Arkansas – For a man who has had his salary cut 10 percent and now has to work hard to make it to his next paycheck, Denny Robertson is in a philosophical frame of mind.

“I have had to learn to live with less. But I have shelter and I have food, so I have everything I need," he said. "It’s uncomfortable to run out of money before the next paycheck, but we’ll get by.

Robertson, 34, is a product engineer at tool maker Kennametal Inc. at a facility in nearby Rogers. Facing the longest and deepest recession since the 1930s, earlier this year the company laid off some staff locally and – in a bid to preserve jobs – gave others one week of furlough, or unpaid leave, every month.