David Rosenberg: "How Can There Not Be A QE3?"

Tyler Durden's picture

From Rosie's "Breakfast with Dave"

Keep in mind that the Fed, unlike the European Central Bank, has a dual mandate — and the one pertaining to the goal of full employment is becoming even more elusive. The unemployment rate has already gone from 8.8% three months ago to 9.2% as of June and that is now well outside the year-end FOMC central-tendency projection band of 8.6% to 8.9%. The Fed believes it will be down to 7.8-8.2% by the end of 2012. Good luck.

The economy is going to need a lot more help to get to these numbers — not to mention the 3.2% consensus GDP growth forecast for the second half of the year. It looks like the majority of economists are in for another big surprise as they were heading into 2008 where visions of soft-landings filled the air.

Keep in mind that every recession was ushered in by a rise in the unemployment rate of 0.5 percentage point or more. We have now gone up 0.4 of a percentage point. Just another 10 basis points to go before the sufficient condition kicks in. And in this context we just love these two quotes on the front page of the Investors Business Daily:

  • "July and August ought to be a lot better than May or June."
  • "The chances of a recession are still pretty remote."   

You have to love the optimism but at the same time be a tad worried about the high level of denial out there. So many analysts cling to the ADP report and that it was the payroll data that were out of line (really, and what about the Household survey which showed a 445k plunge?). It is the ADP that is supposed to forecast the Bureau of Labor Statistics report, not the other way around.

It is also completely wrong to assume that the other data points for June were really that good, either. The ISM may have risen, due to inventories, but 80% of the regional indices were down and the non-manufacturing index was down as well. Maybe it was the manufacturing ISM that was out of line. Yes, yes, chain store sales were decent, but calendar effects and massive discounting helped out. And auto sales undercut May's lows and that is counted as consumer spending too, believe it or not. Consumer confidence and the NAHB index were very soft last month. Jobless claims at around 420k are indeed consistent with soft jobs data at a time when hiring levels are still so subdued. The euphoria over energy prices is bizarre considering that oil is still 30% higher now than it was a year ago.So sorry — the employment numbers on Friday were totally consistent with many of the other "extended" soft patch data that were released in June.

Everybody who is bullish on growth cites lower gas prices but this is the dog chasing its tail — volume consumption is down 5.5% YoY. Demand destruction is at play — have a look at the chart below and you will see that this is actually a recessionary statistic!


Source: Gluskin Sheff