Strategic Briefing | 8.5.2011 | Recession Risk

Odds of double-dip recession grow
MercuryNews | Aug 4
In a report titled “Markets tumble, recession alarm bells ring,” consulting firm IHS Global Insight Thursday put the odds of a new recession at 40 percent. Vanguard economists are estimating the odds of a double-dip recession at around 35 percent to 40 percent, up from 30 percent last year, [Roger] Aliaga-Diaz [Vanguard Fund senior economist] said. Economists still consider the most likely scenario to be a very slow-growing economy that feels like a recession, but isn’t one officially.
NY Fed Model: 1-in-125 Chance of 2012 Double-Dip
Carpe Diem (Professor Mark Perry) | Aug 4
The New York Federal Reserve updated its “Probability of U.S. Recession Predicted by Treasury Spread” this week with treasury yield data through July 2011, and the Fed’s recession probability forecast through July 2012. The NY Fed’s Treasury model uses the spread between the yields on 10-year Treasury notes (3.00% in July) and 3-month Treasury bills (0.04%) to calculate the probability of a U.S. recession up to twelve months ahead (see details here) using the spread between those two yields (2.96% in July).

Bernanke to the rescue?
The Economist | Aug 4
The good news is this: the Fed can’t help but act. On Tuesday, I worried that the Fed would stand pat at its meeting next week, leaving the economy to dip into recession before it finally reacted in late August or following its September meeting. That no longer seems like the most likely outcome to me; events are moving too fast. Ben Bernanke may not announce a new policy next week, but I believe he will hint at new Fed easing—potentially at new purchases, but perhaps also at other available tools. The drop in inflation expectations should force the Fed’s hand. Ideally, it will also shake Congress out of its destructive state. Extension of the payroll tax cut and emergency unemployment benefits would improve confidence, reduce projected fiscal tightening over the next year, and ease the suffering of the unemployed. The double-dip is at the door. Only quick action can send it packing now.
Strategists See 17% S&P 500 Rally on Earnings
Bloomberg | Aug 5
Wall Street has never been more sure that the Standard & Poor’s 500 Index will rally in 2011, even after speculation the U.S. economy is heading for a recession prompted the biggest plunge since the bull market began. Chief strategists at 13 banks from Barclays Plc (BARC) to UBS AG (UBSN) see the benchmark measure of American equity surging 17 percent through Dec. 31, the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks, while mounting concern U.S. growth is slowing drove the S&P 500 down 11 percent since July 22, including yesterday’s 4.8 percent tumble.
Time to Say It: Double Dip Recession May Be Happening
The New York Times | Aug 5
If this is the beginning of a new double dip, it will have two significant things in common with the dual recessions of 1980 and 1981-82. In each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. The recovery came when credit conditions recovered. And in each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.
Insight: Debt relief replaced with recession fear
Reuters | Aug 3
Former Treasury Secretary Lawrence Summers said in a Reuters column there is a one in three chance of a U.S. recession. According to number crunching by Goldman Sachs, history suggests the economy is perilously close to tipping over the edge. Signs are little better elsewhere. Italy and Spain are edging closer to the euro area debt danger zone, China’s economy is slowing and Japan is mired in recession after the March earthquake. The gloom is hitting the corporate world as analysts cut earnings forecasts globally, especially in export-led economies, and big banks have announced tens of thousands of job cuts.