It's Recession 2012! Early Signs of Economic Slump Emerge

on August 03 2011 6:47 AM
U.S. President Barack Obama
President Barack Obama talks about the debt ceiling crisis in the briefing room at the White House in Washington July 31, 2011. REUTERS

The Obama administration fought back from the brink of a Treasury default by agreeing to cut trillions in government spending, but serious questions about the economy's health remain. The spending cut has already sapped investor morale and enhanced fears that a downturn will be worse than the previous one when it comes to escape avenues.

Economics stalwarts are already flagging yet another recession that is gathering force. At least two economic experts have sounded the alarm bell, saying the chance of the U.S. slipping into another recession is stronger now than before.

With more than 14 million people out of work, consumer spending falling by the day, the GDP growth outlook remaining grim and rising inflation denting confidence of ordinary people, a massive spending cut of more than $2 trillion would be the proverbial last straw.

“There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth,” Harvard University economics professor Martin Feldstein told Bloomberg. “This economy is really balanced on the edge."

Analysts now say that the recession of the last decade was deeper than initially estimated and the recovery from it weaker than thought. The massive stimulus program unleashed by the Federal Reserve in the form of Quantitative Easing (QE) did not lift jobs and promote growth, at least not as much as expected.

"The odds of the economy going back into recession are at least 1 in 3 if nothing new is done to raise demand and spur growth," Former Treasury Secretary Lawrence Summers wrote in a Reuters column. "If these judgments are close to correct, relief will soon give way to alarm about the United States' economic and fiscal future."

There is bad news not just from the U.S. The European situation remains grim with big EU economies like Spain and Italy inching towards debt crisis, while Japan is still struggling with its post-tsunami recovery. In China, the pulsating growth engine of the world, that growth has become slower.

Banks heralded the previous meltdown and the recession it preceded, and this time around, big financial institutions have set the ball rolling by announcing deep job cuts. Global financial majors like Barclays, HSBC, Credit Suisse, UBS, Lloyds Banking Group and Rabobank have announced job cuts in the thousands.

GDP and Jobs

U.S. Gross Domestic Product in the first quarter was revised sharply down to 0.4 percent from 1.9 percent, while the economy grew only 1.3 percent in the second quarter. This scenario means the overall GDP growth for 2011 will not get anywhere near the Fed's 2.7 percent to 2.9 percent forecast range.

Capital Economics says it has revised down their estimate of 2011 GDP growth to 2 percent from 2.5 percent previously. JPMorgan cut its forecast of economic growth in the United States in 2012 to one percent.

"With the deficit reduction package that accompanied the last-minute deal to raise the debt ceiling showing that a move toward fiscal consolidation is well under way, GDP growth will remain low and the unemployment rate will remain high next year too," Capital Economics analyst Paul Dales wrote in a note to clients.

Unemployment rose from 8.8 percent in March to 9.2 percent in June. "That's unlikely to change even if July's payroll figures (due Friday) are a bit stronger than in recent months. In other words, with the unemployment rate well above the Fed's long-term range of 5.2 percent to 5.6 percent, on the 'maximum employment' half of the Fed's dual mandate there is a clear case for QE3," wrote Dales.

According to Goldman Sachs, the U.S. unemployment data throws some light into the dark possibility of another recession. "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," Goldman Sachs stated.

What this means in plain speak is that if the jobless rate touches 9.3 percent in July and stays there through August, it would signal that the recession wolf is at the door. Currently, the average three-month unemployment rate in the U.S. is 9.07 percent. It was 8.90 percent in April. On a monthly basis, unemployment rose from 8.8 percent in March to 9.2 percent in June.

According to Goldman Sachs, if unemployment continues to rise in this pattern, there will be a 76 percent chance the economy has already entered recession or will be there in the next six months.

"I think you're getting increasing signs that we're at a risk for a double dip," Meredith Whitney, founder and CEO of Meredith Whitney Advisory Group, told CNBC. "Our GDP number on Friday was an indication that states and local governments, which make up 12 percent of GDP, are really pulling back. We're certainly at a double dip of housing. That puts enormous pressure on the economy."

The news from the auto and housing markets, two sectors that can potentially make or break economy's future, are less than robust. Auto majors have faced a dip in revenues from the double impact of a gasoline price rise and the production bottlenecks created by the Japanese tsunami. The consumers have also pulled back from buying new cars, fearing the economy's outlook is not bright enough.

In the housing sector, the last two months witnessed a downturn. "Negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4,” according to property research firm Zillow.

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