Recession?
By Gus Krafve
2011-09-19
Certainly, the evidence for a recession in the U.S. is piling up. The latest nonfarm payrolls number showed zero growth in August, well below economists' expectations for a gain of 80,000 jobs. Private payrolls added 17,000 jobs, its worst performance since February 2010. The unemployment rate remained high at 9.1%. Continued high unemployment is one of the main factors that have led to a continued deterioration in the Consumer Confidence Index which recently hit levels consistent with past recessions. The latest reading showed the index dropped 14.7 points in August, the most since October 2008. The University of Michigan Consumer Sentiment Index also fell to levels not seen since the last recession. Further softening is also showing up in the manufacturing sector. The widely followed ISM Manufacturing Composite Index (PMI) fell 0.3 points to 50.6. This reading is its lowest since July 2009, and indicates a near-stagnant rate of growth. When the PMI is below 50, it means that the manufacturing segment of the economy is contracting. The index held above 50 which bolsters the case for no recession at this time.
Heightened concerns of a recession have driven bond prices higher and bond yields in many segments of the bond market have gone lower. As I am writing this piece on September 6, the yield on the 10-year US Treasury bond hit a record low yield of 1.92%. These record low yields on Treasuries are an indication the bond market is betting that the odds of a recession are high and the odds of significant inflation are very low. The year-to-date performance numbers as of August 31 for the major market indices are as follows:
The latest economic data is likely weak enough to compel the Fed to do something at its next meeting scheduled for September 20-21. Remember, it was last September when we were also discussing the possibility of a recession, as the economic numbers were deteriorating. In the midst of the worsening economic numbers, the Fed instituted its Quantitative Easing II at their September 2010 meeting. We had a subsequent rally in equities and the economy improved. We are not convinced that the Fed has enough magic bullets to engineer a similar result this year but the old adage goes "don't fight the Fed."
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