Yesterday, we looked at how and why the Yield Curve implies a "Probable Recession."
Today, we go to Merrill Lynch’s North American Economist, David Rosenberg, who observes that: "Our recession-risk indicator puts the probability that there will be an economic downturn in the coming year at 51%. That’s the highest level since the 2001 recession."
Now, its one thing for our little blog here to say a recession is becoming increasingly likely — I’m more in the 60% camp myself. Indeed, back in the Summer of 2005, we identified that a late 2006/2007 recession was increasingly possible.
But Merrill Lynch manages a trillion or so dollars, and its worth noting when their economist foresees an increased possibility of recession.
Here are the factors Rosenberg identifies as influencing his thinking:
• "The Institute for Supply Management’s (ISM) purchasing managers’ index came in at a weaker-than-expected 51.2 for October, down from 52.9 in September. The consensus was 53.0."
Rosenberg notes that in the past, whenever the ISM index hit 51.2 while in a downtrend, it eventually broke below 50 — the dividing line between expansion and contraction in industrial activity. Rosenberg adds that "once it does that, history shows that the Federal Reserve cuts rates within two months." Therefore, watch the 50 level on ISM to help forecast the next rate cut.
• "Our recession-risk indicator puts the probability that there will be an economic downturn in the coming year at 51%. That’s the highest level since the 2001 recession."
This is a proprietary indicator, so I plead ignorance as to its components. Rosenberg does note that historically in all but 2 times, it accurately forecast a recession (knowing out of how many signals would be helpful). The average lead time between the penetration of 50% and a recession was 12 months, and the median was 10 months. That would put the ML recession (only 51%) somewhere in September-November 2007, and the market reaction sometime between March and May 2007.
• "We think GDP will grow at an annual rate of roughly 2% for the fourth quarter, and the risk is on the downside in light of the weak "handoff" in terms of macro momentum as the quarter began and what we know so far anecdotally about spending in October."
• "Our 2007 GDP growth estimate of 2% hasn’t changed, but keep in mind that our forecast assumes that the Fed will cut the funds rate to 4% next year. Without that stimulus, growth could well be closer to 1.0% to 1.5%. That would be weak enough to be in the hard-landing zone that sees a sharp reversal in the unemployment rate and the emergence of credit problems"
This is premised on a few factors: No major new stimulus, externalities, oil shocks, etc.
Risk of Recession Builds
Merrill Lynch, November 3, 2006
For the next edition of our series, Blog Spotlight, we travel West to Mark Thoma at the University of Oregon for his Economist’s View.
Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987. His research involves the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables, and he has conducted research in other areas, such as the relationship between the political party in power and macroeconomic outcomes. Mark blogs daily at Economist’s View.
This is part of our ongoing short list of excellent but somewhat overlooked
blogs that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Today’s focus commentary looks at: Worker Security, Social Insurance, and Protectionism
More on the decline in worker security:
US faces globalisation without safety net, by Alan Beattie, Commentary,
Financial Times: If Americans are feeling ever more insecure about
inequality, jobs and globalisation, they are not alone. The concerns of the
"anxious middle" income earners are echoed across the Atlantic. But …
Americans have tended to display a much greater tolerance for the type of
economic dislocation that can accompany globalisation…
Category: Blog Spotlight