- Our baseline forecast calls for an ongoing weak-to-moderate economic expansion characterized by continued solid corporate profits, steady business investment, low interest rates and moderate energy prices, but only subdued job creation, constrained consumer spending and weak government spending. In this economic environment real GDP growth maintains a shallow positive trajectory that brings the unemployment rate down very slowly and allows the economy to continue its healing process. The unemployment rate finishes this year uncomfortably high at 8.8 percent for 2011Q4 and only declines to 8.2 percent for 2012Q4. Weak-to-moderate growth means ongoing susceptibility to “transient” economic events and likely more “soft patches” to come. The next most likely scenario is a shallow recession in 2012 with much smaller job losses than we saw in 2008/09. With many excesses now wrung out of the economy, a repeat of a deep recession accompanied by large scale layoffs across many industries is unlikely.
- Labor markets fell flat in August with zero net jobs added to the U.S. economy according to the payroll survey, marking the fourth consecutive month of subpar job creation. The headline number was held down by the loss of 47,000 telecom workers, due to the now resolved Verizon strike. The good news in the report was that the unemployment rate did not increase but remained at 9.1 percent.
- Of major concern are the consequences of the rapid decline in consumer confidence visible in August. The month began with rancorous political debate and brinksmanship leading up to a last-minute deal to raise the federal debt ceiling. This was quickly followed by the downgrade of the U.S. sovereign debt credit rating by Standard & Poors (not matched by Moody’s and Fitch). Then we witnessed more stress in European financial markets accompanied by concern of a spreading Euro-zone banking “contagion.” By mid-August it was apparent that consumer confidence was badly shaken as first the University of Michigan Consumer Sentiment Index plummeted back into recession territory, followed by the Conference Board’s Consumer Confidence Index. (See discussion on the next page about the relationship between consumer confidence and spending.)
- The Federal Reserve took the historic step of redefining the intentionally vague “extended period” for a nearzero fed funds rate to a now more definite mid-2013 date. The August 9 announcement had the unintended consequence of intensifying fears of a near-term recession. In his annual address at Jackson Hole on August 19, Fed Chairman Bernanke hinted that the Fed had more policy options to discuss by announcing that the scheduled one-day FOMC meeting on September 20 would be extended to two days. Options available to the Fed include an “Operation Twist,” which would be used to lower the long end of the Treasury yield curve.
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