Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.
Economists have long known that the overall performance of the economy as measured by GDP has a direct bearing on unemployment. But the relationship between changes in output and changes in the unemployment rate deviated from expectations in 2009. Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate. Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1½ percentage points. Instead it rose by 3 percentage points, more than twice the predicted increase. We examine what might have disrupted the usually reliable empirical relationship described by Okun. Our results indicate that the main factor driving the unusual rise in unemployment relative to output was very rapid productivity growth, which allowed businesses to cut back sharply on labor while maintaining output levels.
When the time comes to tighten monetary policy, the Federal Reserve will be embarking on a tightening cycle like no other in its history. First, this tightening cycle will have two policy dimensions, in that the FOMC will have to decide on the path of its asset holdings in addition to the path of the short-term interest rate. Second, we will be using tools to drain reserves that are new and that will have to be implemented on a scale that the Fed has never before tried. And third, we will be operating in a framework of interest on reserves that has not been fully tested in U.S. markets.
Geithner doesn’t breed nuance of opinion. You’re either for him or against him, and popular sentiment leans strongly toward the latter. But it’s possible to view him as someone who was indispensable in halting the crisis (his understanding of Wall Street’s psychology was particularly valuable) while still doubting whether someone so steeped in the institutional cultures of Washington and Wall Street has the necessary distance to direct their reform. Click through for a "profile of how Timothy Geithner saved the economy, and why he's the wrong man to fix Wall Street."
The Greek crisis has brought sovereign debt to the forefront, capturing markets' attention. We think another dimension of the sovereign issue, the inflation risks inherent in high levels of public debt for economies that can print their own currency, is being overlooked by the markets. High levels of public debt in many advanced economies raise the spectre of inflation, in our view: if high debt is deemed undesirable, but the political will for higher taxes and lower spending is lacking, then ‘soft default' through inflation becomes a possibility. We think investors should hedge against inflation risks.
Banks with more than $100bn of assets will be overseen by the US Federal Reserve under a regulatory reform plan that represents a partial victory for the central bank after months of attacks in Congress. Chris Dodd, the Senate banking committee chairman, had proposed hiving off all bank supervision to a single regulator but is set to propose this week that the 23 largest institutions stay under the Fed’s oversight, according to people familiar with the plans. The regime is designed to prevent a repeat of the costly bail-out of AIG or the damaging bankruptcy of Lehman Brothers. The Fed’s retention of authority over the biggest banks is partly a result of demands by Tim Geithner, Treasury secretary and former president of the New York Fed, who has told senators that only the central bank is qualified to oversee the core of the system.
Greece survived a key test by raising €5 billion ($6.85 billion) in a bond sale, but investors warned that a looming wave of debt auctions by other European countries could make it difficult for Athens to raise the rest of the money it needs. The sale suggests that the European Union's strategy for dealing with the Greek crisis by relying on rhetoric instead of direct intervention is working. What most concerns European officials is that Greece's woes could spread to other countries and banks on the euro zone's periphery, endangering the common currency.
In our view, the recovery won't be jobless, but gains will be tepid. We expect annual job growth to average 1% (110,000 monthly) over 2010-11, excluding hires for the decennial census. Even those modest gains are not a foregone conclusion. Job losses have abated, and some labor-market indicators have improved, but employment has yet to turn up. Our unemployment problem has become increasingly chronic. Two statistics document that fact: The median duration of unemployment has reached 20 weeks, more than twice the peak in the deep 1981-82 recession, and a record 41% of the unemployed have been jobless for six months or longer. This note outlines where job gains are likely to be over the next two years and why; we also identify four specific obstacles to hiring.
In its latest beige book report, the Fed said nine out of its 12 regional districts reported that economic activity improved, but in most cases the increases were modest, with activity held back by the Feb. 4-7 and Feb. 9-11 snowstorms. Consumer spending, a key growth engine for the U.S. economy, improved slightly in many districts since the last Fed beige book was released Jan. 13. But it was hampered in several regions by the severe weather of early February, the latest survey showed.
e21 PRESENTS
TODAY'S NEWS
e21 IS SOCIAL
Market Talk