No Recession for U.S. as Forecasts Improve

By Rich Miller and Vivien Lou Chen - Oct 10, 2011 5:34 PM GMT+0700

The U.S. has likely dodged a recession for now, even though it’s too early to sound the all- clear for the economy.

A string of stronger-than-projected statistics -- capped by the news on Oct. 7 of a 103,000 rise in payrolls last month -- has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their growth forecasts for third quarter growth to 2.5 percent from about 2 percent. That’s nearly double the second quarter’s 1.3 percent rate and would be the fastest growth in a year.

“The U.S. economy doesn’t look like it’s double-dipping at all,” said Allen Sinai, president of Decision Economics Inc. in New York. “But it is a crummy recovery.”

That recovery still faces what economist Chris Rupkey in New York calls “a lot of headwinds.” These range from the sovereign-debt crisis in the euro zone -- and increasing likelihood of a recession there -- to political gridlock in the U.S. over the budget.

“We can skirt a recession,” said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. “But if headlines worsen in Europe and cause a major stock-market rout, it could lead to a loss of confidence here on the part of businesses and consumers and make forecasts for a recession a reality.”

Crisis Plan

European stocks and the euro rose after German and French leaders pledged to devise a plan to stem the debt crisis in three weeks. U.S. stock futures also gained.

The unsettled outlook may push U.S. Treasury bond yields back down as investors seek safety in the debt of the world’s largest economy. The yield on the 30-year bond remains on course to fall to about 2.5 percent, according to Christopher Hine, vice president of technical analysis at Credit Suisse Securities in London.

“The bull trend is still there,” he said in an Oct. 7 conference call with clients.

The long bond ended trading at 3.017 percent in New York on Oct. 7, after touching 2.69 percent Oct. 4, the lowest since January 2009. Yields rose as concerns about a recession ebbed.

The Standard & Poor’s 500 Index will face difficulty trading above 1,200 in the next few weeks as investors seek to determine the impact of the European crisis on U.S. corporate earnings, Sinai said. Business with Europe represents about 20 to 25 percent of operating profits for companies in the S&P, Sinai said.

Futures Rise

S&P 500 futures added 1.4 percent as of 11:24 a.m. in London, while the Stoxx Europe 600 Index rose 0.6 percent, extending a three-day, 6.7 percent jump. The S&P 500 had climbed as much as 0.6 percent on Oct. 7 on the back of the jobs numbers before being erasing gains after Fitch Ratings downgraded the foreign and local currency long-term issuer default ratings for Spain and Italy.

The euro advanced 1.6 percent against the dollar and strengthened 1.5 percent versus the yen after German Chancellor Angela Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital.

Exceeded Forecasts

The 103,000 gain in September payrolls announced by the Labor Department was more than economists had forecast and followed an upwardly revised gain of 57,000 for August. Private employment climbed 137,000 and included the return of 45,000 striking workers at Verizon Communications Inc.

“The continued forward momentum in private job growth should ease concerns that the U.S. will slip into recession in the second half of this year,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

The latest numbers bring the jobs data in line with what other statistics are suggesting: Gross domestic product is growing “very slowly,” not contracting, he said.

Construction spending rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years. Manufacturing accelerated in September, helped by gains in exports and production.

“For the first time in eight months, we revised upward our forecast of GDP growth over the second half, to just shy of 2.5 percent,” economists at St. Louis-based Macroeconomic Advisers said in a report last week. In September, they were predicting second-half growth under 2 percent.

The drags on the economy in the first half of the year -- higher gasoline prices and supply-chain disruptions from the earthquake and tsunami in Japan -- are dissipating, giving growth a lift, Feroli said.

Upward Revision

The average price for unleaded gasoline fell almost 20 cents, or 5.4 percent, in September to $3.43 a gallon, according to AAA, the nation’s largest motoring group.

The automobile industry has been an obvious beneficiary. Car and truck sales rose to a seasonally adjusted annualized rate of 13.1 million in September, according to Autodata Corp. That’s the highest since April’s 13.2 million, when lost output caused by the tsunami started restraining supply.

With vehicle production and inventories recovering for Toyota Motor Corp. (7203) and Honda Motor Co., the fourth quarter may be the year’s strongest, Al Castignetti, Nissan Motor Co.’s vice president of U.S. sales, said in an Oct. 3 telephone interview.

“People who have been sitting on the fence are likely to get back in the market,” he said.

While the U.S. is “shaking off” the first-half drags, it faces risks from events at home and overseas, Feroli said.

‘Edge of Recession’

The debt crisis in Europe will “likely slow the economy to the edge of recession by early 2012,” Andrew Tilton, senior economist at Goldman Sachs in New York, said in note last week to clients. He sees growth falling to a half percent in the first quarter of 2012.

A mild recession in the euro zone could shave as much as a half percentage point off U.S. expansion, said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc. The direct effect on trade likely would be small, he said. U.S. exports to the euro area were equivalent to less than 2 percent of GDP last year.

Greater consequences could come from the financial links between the two economies and the impact of the crisis on the U.S. stock market and general confidence.

“Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand,” Treasury Secretary Timothy F. Geithner said Oct. 6 in testimony to the Senate Banking Committee. That would pose a “significant risk to global recovery.”

Confidence

Policy makers in Europe aren’t the only officials on the spot, according to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. Authorities in the U.S. also need to act, she said. If a Congressional supercommittee can’t come up with the more than $1 trillion in budget savings required by November, “that further undermines confidence in our own government,” she said.

The U.S. also faces a big fiscal squeeze in 2012 from the scheduled expiration in December of a payroll-tax cut, extended unemployment benefits and a business-tax credit.

“We have a very big tightening on track for next year,” Feroli said. He put the amounts involved at about $350 billion, or the equivalent of about 2 percent of GDP.

President Barack Obama has offered a $447 billion jobs plan that includes an expansion of the payroll-tax cuts in 2012 and an extension of the unemployment benefits. It faces resistance in the House of Representatives, where Republicans hold the majority and oppose the tax increases Obama proposed to pay for the program.

“We’re still laboring under the fallout from the bursting of the housing and credit bubble,” Jan Hatzius, chief economist for Goldman Sachs in New York, told Bloomberg Television on Oct. 7. “In the aftermath of that, unfortunately, you’re often in a weak position for a long time.”

To contact the reporters on this story: Richard Miller in Washington at rmiller28@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net