U.S. and Canadian economies to avoid double dip recessions
TORONTO, July 27 /CNW/ - The U.S. and Canadian economies will see growth
slow over the next six months but are unlikely to experience a
double-dip recession, finds CIBC's Recession Probability Index.
The Index, which has a strong track record of forecasting recessions,
finds the odds of another U.S. recession occurring in the next six
months are very low. The CIBC RPI measures the probability of a
recession by examining trends in a number of indicators, including
credit spreads, interest rates, and the Philadelphia Federal Reserve
Board's ADS Index (which includes weekly U.S. unemployment benefit claims).
"We're not in material danger of a rude double dip in the next two
quarters," says Avery Shenfeld, Chief Economist at CIBC. "The
probability estimate is likely more consistent with a slowdown rather
than a true double-dip recession. But, given the uncertainties, fiscal
tightening ahead and the potential for a slow economy to be vulnerable
to shocks, we will keep an eye on our new indicator nevertheless."
In his latest Economic Insights report, Mr. Shenfeld notes that
consumers and investors alike are starting to fret over the possibility
of a double-dip recession, but he says in the modern era, double dips
are more often feared than reality. "A double dip is to be avoided at
all costs when holding a potato chip at the buffet line, and less
trivially, when steering economic policy.
"Indeed, if one defines a double dip as a downturn after an expansion
lasting less than two years, the only post-WWII U.S. twin dives were the
recessions of 1980 and 1981-82. Double dips have also been rare in other
major economies of late, although Japan fell into recession in 2000 only
a year after it emerged from the "Asian crisis" recession."
He cites a number of factors that he expects will keep the American
economy from hitting a double-dip. First, he expects that the U.S.
government will back away from shutting off the stimulus taps too
aggressively in the face of lagging job growth. But since U.S. President
Barrack Obama's gradualist approach to deficit reduction will still be a
negative for growth, monetary policy will have to remain very
stimulative. As a result, even a modest tightening by the U.S. Federal
Reserve Board in the second half of next year now looks premature. Best
bets are that Ben Bernanke's team will seek no exit from low rates until
2012.
"Fiscal policy might move off its tightening war-path. Congress already
backed away from an earlier posture that would have let extended
unemployment benefits lapse, and legislators now talking like tigers on
deficits could become pussycats favouring stimulus in the face of
continued high joblessness in 2011."
Other factors Mr. Shenfeld sees that suggests the U.S. economy, and by
extension Canada's, will avoid a second recession:
- Healthy corporate profits. These typically presage both hiring and
capital spending and will likely benefit further from continued
government stimulus.
- Strong market liquidity. A recent study in the Journal of Finance
found that a drying up in market liquidity is often a telling sign of
economic trouble ahead. Liquidity plummeted at a pace not seen in
more than 20 years ahead of the recent downturn. At present, market
liquidity isn't sending out the same sort of warning signal.
- Steep bond market curves. The US Treasuries curve is much steeper
today than it typically is when a recession is coming up in the next
few quarters. Although, with short rates near zero, curve inversions
can't occur.
- Tight corporate spreads. Ahead of a recession, spreads tend to widen
sharply as investors anticipate credit defaults. Spreads remain
quite tight by the standards leading up to recent recessions, and
don't show the sharp upward trend typically seen ahead of a downturn.
It's clear that investors are far from pricing in a recession.
"Certainly, there are reasons for concern," adds Mr. Shenfeld. "The U.S.
economy has been propped up by fiscal stimulus that is now winding down.
Job growth has lacked its typical post-recession vigour, leaving a
household sector swamped with bad mortgages having few reasons to
accelerate spending. But there is still a base of ongoing support coming
from healthy corporate profits and a wide-open tap on monetary stimulus.
That has us projecting a sharp deceleration in U.S. growth, but not an
outright recession, with a similar fate in store for Canada."
The complete CIBC World Markets Inc. report is available at:
http://research.cibcwm.com/economic_public/download/sjul10.pdf .