Photo: Dallas Fed
By now it’s trendy to be bullish on the US recovery — so trendy in fact that even David Rosenberg ended up being over-optimistic on today’s ISM. But for the holdouts, Harvey Rosenblum and Tyler Atkinson at the Dallas Fed have put together a good explanation of why a double dip is for all intents and purposes off the table.
What it boils down to is that none of the signs that have ALWAYS screamed double dip in the past are showing up.
'The difference between the 10-year Treasury yield and the one-year note turned negative--that is, short-term interest rates were higher than long-term rates--before every recession in the postwar era, with one false signal in 1966 (Chart 2). A common explanation for the predictive power of the yield curve draws on the assumption that long-term interest rates--to a great extent, though not perfectly--represent expectations of future short-term rates. In that case, an inverted yield curve indicates a market expectation that short-term interest rates will be lower in the future than they are today. Because interest rates tend to be procyclical--they rise with a growing economy and decline with a contracting economy--an expectation of falling interest rates suggests that market investors believe a recession lies ahead. This is reinforced by monetary policy. Since short-term interest rates hew close to the overnight interest rate target set by the Fed, an inverted yield curve is, equivalently, signaling an expectation that the Fed will soon be reducing its target interest rate--something that typically happens when recession is imminent or has already begun.'
'An even more reliable signal of recession, albeit with a lag, is a 0.33 percentage point increase in the three-month moving average of the unemployment rate from its recent low. This signal assumes that workers losing their jobs cut spending almost immediately. Demand for goods and services slides. Using revised data, this unemployment jump is a flawless indicator in the postwar era, signaling every recession either before it began or within three months of its start.'
'The yield curve's steep upward slope suggests a low probability of a recession in the coming year. Nonetheless, many economists are reluctant to rely on this indicator because the curve's shape and slope have been distorted by the Federal Reserve's unconventional monetary policy: a near-zero federal funds rate and a quantitative-easing program that damped intermediate- and longer-term Treasury rates. With near-zero short-term rates, it is almost impossible for a yield curve inversion, that is, short-term rates exceeding longer-term ones.
'There is some reason to believe the unemployment rate could climb again. Claims for jobless benefits remain at a level usually associated with an increasing unemployment. Even if the rate does not increase, it remains elevated, straining the overall recovery.
'While the current real price of oil does not fit the criterion of a shock, it sits at levels only seen in the early 1980s and 2006--08. An oil supply shock would be especially damaging to the already weak recovery.
'Most forecasters project growth at 2 to 3 per cent over the next year, but not gaining sufficient momentum to advance safely above stall speed. Until this situation is resolved, policymakers will continue facing pressure to pursue fiscal and monetary measures to guide the economy toward full employment and more robust growth.'
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