Recession déjà vu felt by BNP Paribas’ De Vijlder
William De Vijlder, chief investment officer Strategy and Partners and member of the management committee at BNP Paribas Investment Partners, says in his latest blog that investors are not looking forward to the next US employment figures.
Friday, 8 July 2011, 14:30 CET. Put the date in your diary. That’s when the new US employment data will be published.
After the rude awakening in early June, investors are not really looking forward to the announcement of this figure. Over the past few weeks, US economic data have deteriorated to such an extent that, inevitably, talk of a “double-dip recession” has resurfaced.
There is a sense of déjà vu, and indeed, around one year ago, the markets were wracked with fears of a new recession. In late August, this prompted Fed chairman Ben Bernanke to share his views on quantitative easing with delegates at the Jackson Hole conference and with the media. Interestingly, I have already spotted some references in the media to “QE3”.
The figures have undeniably been disappointing, and the most striking were, of course, the labour market data published in early June.
Another noteworthy development is that surprises over the past few weeks were strongly negative, which confirms yet again that analysts tend to run behind the facts: economic statistics pointing to an improving economy are always accompanied by positive surprises, but the converse is equally applicable, because weaker figures are accompanied by negative surprises.
These surprises effectively hit equity investors with a double whammy: “improvement” means “surprisingly strong improvement”, and “deterioration” means “surprisingly strong deterioration”, the latter being sufficient to boost risk aversion.
Hence it is quite understandable that US 10-year bond yields dropped below 3.00%, despite inflation, the public debt, the debate on the rise in the debt ceiling and the forthcoming end of QE2 at the end of this month. Analyses of the consequences of an end to QE2 have been swamping the media for some time. These analyses often argue that this situation should push up government bond yields, but, in fact, yields have fallen sharply. So there is more at play than QE2. This was also the case last autumn, when government bond purchases under QE2 could not prevent bond yields from rising because the economy was perking up.
So where do we stand now, at the start of the summer? Here are four questions and four answers.
1. Is the slowdown temporary, or does it herald a new trend?
The fact that recent figures were poor does not say much about the near future.
Most economic indicators provide a recent snapshot of the economy and have only limited predictive value. We can illustrate this with the indicator developed by the Institute of Supply Management (ISM). Since 1948, the percentage change over the preceding three months (758 observations) has been positive (380) just as frequently as negative (378). So the US economy has spent as much time in periods of a rising ISM index as a falling one: neither of these situations is unusual. Moreover, there is virtually no statistical correlation between the previous change in the ISM and the future one. To illustrate this, the fact that the June ISM came out below the level of three months prior to this tells us virtually nothing about the likelihood of its September level coming out above or below the June level.