While equities have had a rough start in 2010, analysts at RBS predict that we won’t experience a double dip recession. Signs of global growth and increased manufacturing brings hope that the economy will fully recover at a rate faster than expected.
For the U.S. to recover, we need jobs and higher payrolls. Let’s drive some more money into this economy and get people back into work.
In 2002, payrolls, as measured by the preliminary print for each month, advanced for seven straight months, but the gains ranged from 6,000 to 66,000. Then, jobs declined for the most part from fall 2002 through the summer of 2003. Net hiring resumed in late 2003 but remained tepid through February. It was only when payroll gains surged (308,000 in March, 288,000 in April, and 248,000 in May) that Fed officials sat up and took notice. Similarly, the swing from massive job losses in early 2009 to rough stability by year-end was very encouraging but is not enough to spur the Fed into shifting its rate stance. Instead, payrolls will have to begin rising and by enough to convince policymakers that unemployment is on a downward path. We fully believe that payrolls are on the cusp of swinging into positive territory and that momentum will build as the year progresses.
Now, that being said, RBS believes the Fed will finally raise interest rates within the next five months, provided no extreme turn of events occur:
Our forecast calls for the first Fed rate hike in approximately five months. The clock is ticking. Clearly, a lot needs to transpire to get from where things stand today to a Fed tightening. Are we getting nervous? Not just yet. Conditions have improved dramatically over the last six months, and we fully expect the trajectory to continue. If the recovery stalls out over the next few months, then we will of course have to revisit our views (not just on the Fed but also our economic forecasts). However, given how well the economy has performed over the past few quarters relative to consensus expectations, it would take two or three months’ worth of evidence to convince us that the economy is fading (especially given the prospect of weather distortions during the winter). Thus, barring unforeseen shocks or jolting downside surprises in the data, we are unlikely to make any significant changes to our Fed call until March or April.
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