US job figures fuel fears of looming recession/The R-word surfaces on Wall Street

US job figures fuel fears of looming recession
By Chris Flood
Copyright The Financial Times Limited 2007
Published: September 10 2007 03:00 | Last updated: September 10 2007 03:00


Fears the US economy could be moving towards recession were fuelled last week by publication of employment figures for August that showed the first decline in non-farm payrolls for four years.

Employment gains have provide an important pillar of support for the US consumer and this week's data releases provide an opportunity to assess how this indication of broader weakness in the labour market could affect confidence and retail spending.

US consumer credit has been rising by an average of $10bn a month this year but a smaller increase of $8.2bn is expected in July's data, due out today. Gaining access to credit will be tougher for many Americans, even if the Federal Reserve cuts interest rates in September. A pressing problem for policymakers is that three-month interbank rates remain well above the Fed funds rate.

Paul Ashworth of Capital Economics explains: "Money market rates are a crucial lever in the economy that will have a knock-on effect on the borrowing costs of creditworthy households and firms as well."

US trade data for July, due tomorrow, are expected to show the deficit widen from $58.1bn in June to $58.8bn, mainly due to higher prices for petrol imports. The University of Michigan's consumer confidence survey, due on Friday, is expected to weaken from 83.4 in August to 83 in September.

The US retail sales figure for August, also due on Friday, is expected to show year-on-year growth increase from 3.6 per cent in July to 3.8 per cent. Car sales rebounded in August, helped by financial incentives from manufacturers, but Max Warburton of UBS warns there is an increasing risk sales volumes will tumble as consumers, particularly those with subprime mortgages, will face more difficulty in accessing credit.

Mr Warburton cites data showing about 13 per cent of the $220bn in car loans raised annually fits the definition of subprime and that an even higher proportion is considered to be high-risk lending.

US industrial production for August, also due on Friday, is expected to edge up from 1.4 per cent year-on-year in July to 1.5 per cent.

Concerns the Japanese economy is slipping back towards recession will be amplified by second quarter gross domestic product data, which is expected to show growth revised from 0.1 per cent to -0.1 per cent.

In the UK, the trade data for July, due tomorrow, is expected to be little changed from June's £6.3bn deficit.

The ILO unemployment rate is forecast to be unchanged at 5.4 per cent in July's data.


The R-word surfaces on Wall Street
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: September 10 2007 03:52 | Last updated: September 10 2007 03:52


The R-word is usually avoided by Wall Street’s economists. It tends to be a conversation-stopper when investment bank clients are told to prepare for the worst.

“It is like looking a client in the eye and telling them that their child is ugly,” says David Rosenberg, chief economist at Merrill Lynch. “It is not what people want to hear.”

But the parameters of polite conversation have shifted following the shock decline in the employment market revealed last week. Recession is the word on everyone’s lips.

“The probability of recession has increased pretty dramatically,” says John Silvia, chief economist at Wachovia. The first monthly fall in employment in four years has undermined one of the few remaining pillars of the economy – a strong job market – that policymakers thought they could rely on to support consumer spending.

With that cornerstone of economic growth weakened, some on Wall Street fear the economy could be dragged into a hole by the gravitational pull of the collapsing housing market.

“You are talking about a $23,000bn asset class – there is nothing on the planet as big as that,” says Mr Rosenberg, who is predicting a fall in house prices nationally of up to 15 to 20 per cent.

The bearish economist points out that “there has never been real estate deflation in this country that failed to end in a destabilising recession”.

He says the historical conditions are falling into place for a deterioration in household wealth and spending by the fourth quarter.

Homebuilding has fallen by a fifth from a year ago to the lowest level in a decade.

Big falls have in the past been followed by recessions, except during the Vietnam and Korean wars, which created offsetting demand.

The housing downturn has caused economic shocks, triggering a crisis of confidence in credit markets and a tightening of lending conditions amid rising defaults on subprime mortgages.

Mr Rosenberg says it may be “too late” for the Federal Reserve to prevent a recession by cutting interest rates aggressively this month.

But many economists are more sanguine, reassuring clients that rate cuts will help restore stability to markets and prevent the economy going into a tailspin.

“It is too soon to call a recession at this point,” says Peter Hooper, chief economist at Deutsche Bank. “The risks have been certainly moving in that direction.”

Bruce Kasman, chief economist at JPMorgan, has pared back his forecasts but sees moderate growth averaging about 2 per cent over the next two quarters. But he warns that economists are “making forecasts these days with pencils not pens”.

Edward Lazear, economic adviser to President George W. Bush, says the White House is not expecting a downturn. “There is always a chance of recession. We don’t think it’s likely.”

The job of declaring recessions – generally defined as two consecutive quarters of economic contraction – does not belong to the White House or Wall Street. That task belongs to Martin Feldstein, head of the National Bureau of Economics.

Mr Feldstein has been blunt about his outlook.

He used the word recession seven times in a recent speech to central bankers, telling them that “a sharp decline in house prices and the related fall in home-building ... could lead to an economy-wide recession”.

He said the type of collapse in housebuilding recorded in recent months was “a precursor to eight of the past 10 recessions”; there was “a significant risk of a very serious downturn”. It was not a popular message.