The latest economic indicators show a slowing in the pace of the recovery in the United States. Together with market sentiment concerning government officials' warning about the uncertainty the future holds for the world's largest economy, created concerns about the possibility of a double dip recession. Anticipating next week's FOMC meeting, market players (and everybody else for that matter) wonder whether the Fed has a package of policies in store.
On the other hand, corporate earnings and ISM of private employment data point in the direction of a recovery of the private sector. Kathy Lien, Director of Currency Research at GFT, explains: “According to a survey by Markit, confidence about business activity hit the highest level since February (...) A growing majority of them plan to increase spending and employment in the near future with the largest gains seen in the U.S., Europe and Japan. If corporate spending increases, it could provide underlying support for the global recovery.”
In the long aftermath of one of the worse recessions in history, the argument has taken grip of the market. Is this rocky path the one the US economy is supposed to be on or is it heading towards a double dip recession? Signals are mixed, interpretations several, but after an extremely worse than expected NFP report, with 131k jobs lost, the waiting game until the FOMC meeting is on, and whether the Fed will unveil a fresh QE package.
FXstreet.com consulted independent experts on these issues:
Double dip recession or recovery: Is the market facing a new wave of bad economic data and bad sentiment? or it is going further in its recovery path?
Measures: Do you think the Fed will announce any measures after next week's meeting? What kind of measures?
Sinan Saleh
The U.S. economy is unlikely to undergo a double dip recession; however, the recovery process will be very slow, as huge challenges are still facing the economy including elevated unemployment levels and tightened credit conditions.
We expect the recent weakness in economic activities to continue throughout this year, while next year the economy should be able to pick up some pace and continue its recovery over a stronger pace, nevertheless, I don’t really see how the economy can meet its long term growth potentials anytime soon, and if that should happen, it could happen towards the end of 2011 not before that.
The Fed will most probably strengthen their stance on interest rates, where I expect the Fed will signal to markets that they will keep interest rates at record lows with a stronger tone this time, but I don’t really believe that is going to be enough for investors, since investors are waiting for the Fed to show some authority, and accordingly, chances that the Fed will announce further measures, which might include expanding their balance sheet and/or resurrecting their MBS purchases program, are rather strong.
Valeria Bednarik
Despite US economy is far from being in good shape, at this point it seems like the constant warnings of various “experts” are the worse the American economy could suffer: a double dip recession: Fears that the economy will move back into a deeper and longer recession, these fears are what actually is making the recovery even more difficult. Fears can affect consumers into restricting their spending and turn those warnings into self-fulfilling prophecies.
Right now, the economy is in the gravitational pull of the recession, that will depend on two main factors: employment and housing sectors, if the unemployment rate remains long enough above 9.5% with no signs of improvement while home prices continue to go down, then there is a big chance of a double dip in the US. Early to say, I’ll go for a slowdown in the recovery for now: give fundamental data at least the second half of 2010 to define a more clear trend.
At this point and considering the data published lately in the US, it seems fears could have receded a bit. I’m focusing in ISM readings, both which show improvements compared to the previous month; that should diluted at least partially, chances of further QE; rates cannot be lowered much more, and rises are discarded until next year, so my answer will be no, I don’t expect the Fed to made any special announcements next week. Maybe after Payrolls, things could be clearer: a shocking negative data, could well induce market to start pricing in some economic easing measures.
Will the Fed downgrade its economic outlook?
After today's extremely disappointing employment data, seems the FED will have to review it's latest outlook; still, last meeting already resulted in an economic downgrade, and they may consider that another one will only exacerbate double dip fears; a smart move would be to leave it unchanged, to calm those market fears.
Andrew Wilkinson
Double-dip – I doubt the U.S. economy is heading for a double-dip recession. While recent data points have largely met with dismay, what’s happening is precisely what Chairman Bernanke has described, which is a slowdown to a moderate pace of activity. This is the result of a gradual erosion of previous stimulus, which managed to contain bearish consumer and business confidence. The trouble ahead for the U.S. economy is the slow pace of job expansion. However, at this point I think you’ll continue to hear the FOMC indicate that this is part of what we should grow to expect given the legacy of the financial crisis.
New Measures? I think the FOMC will address the amelioration in activity in its policy statement next week, just as they did in July. But I predict no change in plans to reenter the mortgage market. The ISM services activity index is possibly the strand of evidence that should serve as a wake-up call to anyone believing that current economic activity is anything other than normal. Should the recovery slow later in the year, which I don’t expect, then the FOMC might decide to do more.
