Pages

Saturday, August 27, 2011

Recession Fear Looms over US Economy


New York, Aug, 27: A string retreat in recent data has increased the probability of a double-dip recession by 80 %, as per the modeling statistics by Bank of America Merrill Lynch that released on Wednesday, data accounted the toll the U.S. debt downgrade by S&P, Europe’s debt issues and stock market volatility.
To be sure, the economic team of Bank of America Merrill Lynch looking for more data is required for it to raise its overall official prediction of a recession. Still, the recent dismal number from the Philadelphia Federal Reserve and the University of Michigan were enough for Merrill to increase its overall probability of a contraction of economy in the next year to 40% from 35 % at the start of this month.

The widespread survey of manufacturing in the Philadelphia region taken toll to its lowest level since March 2009, as per the Fed data. Consumer confidence reading is at lowest level since May 1980, the survey released by Thomson Reuters/University Michigan on August 12.
The weekly jobless claims released Thursday unexpectedly increased to 417,000, above economists’ estimates and further validating the data from earlier in the month.

The Philly Fed had puts a recession probability by 85.7 %, while the consumer survey puts contraction chances at 80 %, as per the Bank of America's probability model, which uses a so-called Bayesian technique that “tests if the economy is in a recession based on the interaction of variables that are associated with turns in the business cycle.”

“More timely consumer and business sentiment indicators dropped in August in response to a range of bad news,” said Michael Hanson, one of the firm’s economists, in the note. “While we concede the risks are rising, a recession is not baked in the cake. If the economy can avoid further shocks, we would expect a modest bounce in growth into the end of the year.”

According to their reading, the Philly Fed has perfectly forecasted four of the last seven recessions. The older Michigan survey has precisely signaled three of the eight recessions in the past.

“It’s a 100 percent chance,” said Peter Schiff, CEO & Chief Global Strategist of Euro Pacific Capital. “In fact the recession might have already started.”

The Bank of America Merrill economics team is less pessimistic than Schiff and is quick to identify that since 1990, the Philly Fed has indicated recessions six times that have never come to fruition. Therefore, a sudden drop of this magnitude is not unusual for this indicator.
In another indicator is that the Fed has decided to keep interest rate low for the long time.

No comments:

Post a Comment