Deutsche Bank: Here Are 10 Recession Signals Splashing Cold Water On Yesterday's Euphoria


Deutsche Bank’s Peter Hooper doesn’t believe that a double-dip into recession is the most likely scenarios, but that doesn’t mean it isn’t a significant threat.

Lower-probability scenarios deserve extreme scrutiny if they are high-impact, and according to Mr. Hooper the risks of a recession have increased substantially as of late.

Deutsche Bank:

Fears of a double-dip recession and the risk of deflation have risen appreciably. While our own baseline forecast has not moved that far, the downside risks have clearly increased.

Obviously yesterday’s ISM manufacturing rebound, and resultant stock market melt-up, made this latest DB piece look a bit ill-timed, but it’s going to take a lot more than a few pieces of good news to overwhelm the slew of recession signals shown here…

Consumer spending

Well, it was receding...

Credit spreads

The financial conditions index

The Leading Economic Indicators index

The much touted Economic Cycle Research Institute index

The Philly Federal Reserve

A Deutsche Bank proprietary index

A nice round-up of probabilities from different sources

The yield curve

Now, a model using the financial conditions index. Here, recession probability has eased lately.

A model using the early warning index. Here, recession probability has spiked.

A model using the Philly survey

A model using the LEI

And yes, a model using the ECRI index

And the yield curve model

Mr. Hooper's conclusion

'Economic and financial developments in recent months have generally been disappointing in the US, and expectations for an economic recovery that were sluggish to begin with are being marked down. The anticipated handoff from inventory swing and fiscal stimulus to growth driven by private final demand has not yet occurred successfully as consumer spending remains cautious, business spending growth appears to be slowing, and construction activity in general is likely to remain dormant for some time to come. Pent-up consumer demand is still expected to carry the day in a historically weak economic recovery, but downside risks are rising.

Hiring remains disappointingly weak for a number of reasons that seem unlikely to disappear any time soon, and the scope for government policy to stimulate aggregate demand seems much diminished. Indeed, risks of fiscal contraction under current policies grows as the expiration of the Bush tax cuts approaches.

Most leading indicators of economic activity have softened, and some point to significant increases in the probability of an economic downturn ahead. We judge the risk of a serious double dip recession to be much reduced by the fact that discretionary spending (on durable goods and structures) has already been cut to the bone, but that does not mean that deflation risk is de minimis any longer.

At this point, the balance is between moderately above trend growth, with unemployment headed lower, and a more sluggish positive growth outcome, with unemployment headed higher. The latter outcome could weaken the housing market and rattle inflation expectations enough to put core inflation back on a downward trend and significantly increase the risks of dipping into deflation. It is this risk that will get the Fed into action again if the below-trend growth scenario begins to appear the more likely outcome.'

See the Deutsche Bank piece for the full details...

(Via Deutsche Bank, Update on recession/deflation risk in the US and euro risk in Europe, Peter Hooper, 1 Sep 2010)

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