It does seem like a re­ces­sion is on in the US

The Pak Banker - - OPINION - John Authers

NO­BODY is happy about the US econ­omy. You do not need to read the busi­ness sec­tions to know that; the political sec­tion should make it am­ply ob­vi­ous. But on Wall Street, at least, there had been a cosy be­lief that the econ­omy was re­cov­er­ing, al­beit with a shock­ing level of in­equal­ity, and that this could be counted on to con­tinue. By the end of Jan­uary, they were re­con­sid­er­ing. Last week, which brought a wel­ter of data, has seen re­ces­sion fears resur­gent.

Bond mar­kets show the depth of con­cern. Bond yields are slid­ing down, sug­gest­ing no great op­ti­mism for growth, im­plicit in­fla­tion fore­casts from the bond mar­ket sug­gest the most de­fla­tion­ary out­look since the cri­sis, and the ex­tra yield that "junk"-cal­i­bre com­pa­nies must pay has risen to lev­els that sug­gest stress is com­ing. The ex­tra yield avail­able for buy­ing longer bonds is fall­ing, sug­gest­ing a be­lief in low growth and in­ter­est rates long into the fu­ture. The Fed Funds fu­tures mar­ket, in which in­vestors hedge against changes in rates, says it is roughly a 50-50 shot whether the Fed­eral Re­serve raises rates even once this year; the of­fi­cial guid­ance is for rate rises. Eq­ui­ties have fallen and bor­ing de­fen­sive com­pa­nies are best- ing the tech com­pa­nies that re­cently dom­i­nated.

Gold has gained some 10 per cent in the last two months, show­ing fear that cen­tral banks no longer have con­trol.

In all of this, Wall Street is in line with Main Street, which ev­i­dently also be­lieves the econ­omy to be in a bad way. Last week, three strands of data were im­por­tant. First came sup­ply man­ager sur­veys for man­u­fac­tur­ing and ser­vices. The man­u­fac­tur­ing sur­vey has been a great lead­ing in­di­ca­tor for growth in the econ­omy as a whole, and it is hold­ing at a level, below 50, that por­tends con­trac­tion.

It has been there for four months. Man­u­fac­tur­ing is a dwin­dling share of US econ­omy but the ser­vices mea­sure, which had been hold­ing up, also dipped last week.

Once the ser­vices data ar­rived, the dol­lar plunged against a range of other cur­ren­cies, and is now back roughly where it was 10 months ago. It had ral­lied on the ba­sis that there would be a dis­junc­tion in mon­e­tary pol­icy, with the Fed­eral Re­serve tight­en­ing while ev­ery­one else loos­ened. As that con­vic­tion faded, the dol­lar re­ceded. On fi­nan­cial con­di­tions, the Fed­eral Re­serve pub­lished its quar­terly sur­vey of banks' se­nior loan of­fi­cers, and found a grow­ing ma­jor­ity of them plan­ning to tighten their stan­dards for lend­ing to com­pa­nies - a re­li­able har­bin­ger of de­pres­sion in the past.

And then came the em­ploy­ment data for Jan­uary. US pay­rolls have in­creased steadily ever since the worst of the re­ces­sion in 2009. Many were braced, af­ter the wor­ry­ing data of the last few weeks, for a big and un­pleas­ant de­cel­er­a­tion in that im­prove­ment. It did not quite hap­pen. The of­fi­cial un­em­ploy­ment rate dropped from 5 to 4.9 per cent, its low­est since 2008, while 150,000 were added to pay­rolls.

This is ev­i­dence of de­cel­er­a­tion, but hard to square with an im­mi­nent re­ces­sion. Adding to the com­plex­ity, av­er­age hourly earn­ings rose by 2.5 per cent year-on-year, fol­low­ing a re­vised gain of 2.7 per cent last month. Af­ter years of ter­ri­ble wage growth - an­other crit­i­cal rea­son for the anger and dis­en­chant­ment which is show­ing it­self on the cam­paign trail - wage growth is now pick­ing up.

This is good news and might be­gin to cheer the many dis­af­fected Amer­i­cans whose liv­ing stan­dards have stag­nated. But wages are now grow­ing faster than the of­fi­cial Fed tar­get of 2 per cent in­fla­tion. That means, de­spite the angst on dis­play in the cam­paign, and the con­fi­dent bets in the mar­ket that the Fed will have to de­sist from rais­ing rates, fur­ther tight­en­ing from the Fed may well still be in or­der. As mar­kets are no longer po­si­tioned for this, that would have a nasty ef­fect on as­set prices. How can the data show­ing a steady em­ploy­ment re­cov­ery be rec­on­ciled with the wide­spread per­cep­tion of on­go­ing re­ces­sion and mass un­em­ploy­ment.


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