When Deutsche Bank's Joey perma-LaWronga finally gives up on his call that has been wrong for about 3 years now, it may be time to i) panic or ii) buy everything with three hands (thank you Fukushima). We are leaning to the former, especially after the upcoming downgrade forces the Fed to launch QE3 in about a month.
From Joseph LaVorgna, Deutsche Bank
Growth recession confirmed; H2 dims; waiting to see jobs
Commentary for Monday: Previously, we highlighted the possibility that the economy was on the brink of a growth recession—a sustained period of below trend growth typically accompanied by rising unemployment. The disappointing Q2 GDP results and downward revisions to the prior three quarters lead us to believe that this indeed is the case. Real GDP in Q2 rose just 1.3%, as personal consumption virtually stalled (+0.1% vs. +2.1% previously). The prior quarters were revised as follows: Q3 2010 (2.5% vs. 2.6% as previously reported), Q4 2010 (2.3% vs. 3.1%) and Q1 2011 (0.4% vs. 1.9%). In light of the softer first half performance of just +0.8% AR, we are making adjustments to our outlook for the second half. We are lowering our estimate of Q3 GDP by a full percentage point to 2.5%; and we are reducing Q4 from 4.3% to 3.0%. These estimates will be subject to further revision pending a couple of near term developments, namely the resolution of the debt ceiling impasse and the outcome of the July employment report. (Although the coming week’s data on ISM manufacturing, construction spending and motor vehicle sales will also be important gauges of activity.) Hence, we are likely to make additional adjustments—potentially sizeable ones—in the relatively near term. For example, if financial conditions tighten significantly in response to a sovereign ratings downgrade or there is a Federal government shutdown, we would make more drastic cuts to growth. We estimate that a 2-3 week shutdown could subtract 1.5% from Q3 GDP growth. A lengthier shutdown could have a significantly more deleterious effect, although we continue to believe that this will not be the case.
Following our discussion from late last week, we estimate the most likely path forward for the debt ceiling at this point in time is a “sweetened” version of the Reid plan, which would presumably entice a sufficient number of moderate Republicans (and most Democrats) to support it—possibly through enhanced spending cuts. In the event that a resolution is not reached, there are a few policy options remaining. It is possible that President Obama could authorize the Treasury to exceed the $14.3 Trillion debt ceiling without congressional approval, potentially citing the 14th Amendment. The President has expressed a strong preference to not use this option, but he has not ruled out the possibility in a crisis scenario. Conversely, if the borrowing limit is not raised, then the Treasury would have to prioritize its payment obligations based on the available funds. Following recent public comments, we expect debt service payments to be at the top of the list—so as to avoid an actual default, which could roil financial markets. Following debt service, there would be some combination of military funding, social security, Medicare/Medicaid, defense contractors, etc. The remaining components would be subject to furlough in a partial shutdown scenario.
The July jobs report takes on heightened significance given the reduced economic momentum now apparent in the GDP data, particularly in light of the soft profile of consumer spending last quarter. We project a +50k increase in nonfarm payrolls (+75k private) and no change to the unemployment rate (currently 9.2%).