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S&P Slashes US Growth Forecast, Says Current Crisis Is Worse Than 2008 As US At "Risk Of Default", Ridicules "Transitory"
First they cut the rating of the US, then the went and downgraded Google, now S&P is going for the "treason trifecta" by just releasing a report which literally takes the US to the toolshed. Among many other things, the rating agency just cut US growth for the next 3 years. To wit: "While July data finally showed a slight improvement in the U.S. economy, it's not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast." We wonder how soon before the realization that the US is in fact contracting will force S&P to downgrade America even further, a move which will force Moodys and Fitch to come up with a AAAA rating for the US in order to keep the weighted average rating at current levels. It gets even worse though as S&P now openly brings the 2008 analogy: "The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good. Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted." And the kicker: S&P, yes S&P, makes fun of the Fed, and specifically the "transitory" nature of the economic collapse: "Continued weak growth after sharply downward GDP revisions has made the "temporary argument" a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn't cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%." And that is how you respond to endless scapegoating that now blames the S&P for the collapse. Look for S&P to make the FBI's most wanted list very shortly.
From S&P:
U.S. Economic Forecast: Still Treading Water
On August 5, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the U.S. to 'AA+' from 'AAA' and kept its negative rating outlook, which increased worries that the economic recovery has faltered. The downgrade and concerns that the eurozone sovereign debt crisis was spreading north to France caused markets to go into a tailspin last week. This likely forced the Federal Reserve to take more policy action, which helped calm markets.
However, while the market panic subsided, recovery concerns that helped launch it are still very real. After the recession officially ended two years ago, the outlook for growth is worsening and the U.S. economy is still treading water trying to stay afloat. The "temporary shocks" sound less convincing, even to the Fed, as an explanation of paltry growth during the last two quarters. The lack of underlying momentum was highlighted in second-quarter GDP report, where backward revisions showed not only how much worse the recession was, but how anemic the recovery really is.
While July data finally showed a slight improvement in the U.S. economy, it's not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast.
It is disturbing that policymakers do not seem to have the weapons or the political resolve to fight the economic crisis. Those policy problems are a large reason why we believe the economy is more vulnerable to another recession. Once again the Fed is willing to step in, just like it did in 2008 when Congress refused to pass legislation (including TARP), as markets spiraled out of control. But this time, the Fed is confronting the collapse with a sling shot, not a bazooka, so its measures will have less bite.
We are not surprised that in the aftermath of the worst recession since the Great Depression, the recovery would be slow and uneven. As history has shown, financial crises are often followed by prolonged recessions, and after that, a long bout of sub-par growth. Several studies measure just how much damage a financial crisis can cause, and how long it can last. According to these studies, economic growth will be slower than normally expected, which most people won't recognize as a recovery.
Just Like Old Times
The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good.
Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted. While some hard data, such as the stronger-than-expected July retail sales and recent jobs report, show that not all news is bleak, the preponderance of evidence to the contrary explains the sour moods. Though we still expect weak growth, not a recession, the data indicate a more drawn-out, painful recovery than the half-speed one we earlier expected.
Continued weak growth after sharply downward GDP revisions has made the "temporary argument" a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn't cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%.
The storms that blanketed the U.S. this winter kept people away from the mall and Japan's natural disaster supply-chain disruptions can only be partly blamed for lower sales. More importantly, the consumers have been squeezed by higher commodity prices which wiped out any benefit of the payroll-tax credit. The high unemployment rate, at 9.1%, kept people cautious, worried that even if they have a job, they may lose it next week. Amid sluggish job market and stagnant wages, the wallets are empty after people fill up their gas tanks.
There are some signs that the second half of 2011 won't look as bad as the first; however, anything slightly better than a 0.8% average growth rate is not impressive. The jobs market will likely remain weak into 2013, so housing will remain soft. We expected some improvement in the jobs market to help revive household formation to absorb excess supply. So without that jobs-related boost, housing won't contribute to the recovery. However, maybe it was retail therapy after all the sour news, but the July retail sales data showed that consumers began to spend more. Total sales jumped an upbeat 0.5% over June numbers, and it's not because of a hefty price tag at the pump. Excluding autos, gas, and building materials, sales were up 0.3% in July after a 0.4% increase in June (sharply revised up from a 0.1% gain). This comes while the government payrolls report posted a better-than-expected 117,000 job gain and the unemployment rate slipped to 9.1% from 9.2% in June. The results by no means suggest that we are in the clear. But at least the economy is inching away from a double-dip recession.
Ready To Take Another Dip?
Does the Great Recession have company? Many think that another crisis will follow the Great Recession. The global stock-market plunge reflected fears that a double-dip recession is coming. The bad news during the last few months suggests that these fears may not be unfounded. The supply shock due to the earthquake in Japan, climbing energy prices, and massive storms have certainly contributed to the slowing U.S. economy. But even the Fed admitted that those events alone may not explain the extent of the decline. As I said in my last monthly forecast report, if a couple of one-offs can do so much damage, it shows just how fragile this recovery is.
As the economic data continue to disappoint, we have become more worried about the strength of the recovery. We have been expecting a half-speed recovery for some time. However, the onslaught of dismal news puts even that forecast at risk. We now expect below-potential growth through the end of next year. And while the numbers are still positive, the smaller they get, the greater the risk of dipping into another recession. On August 5, we increased the chance of a recession in the next year to 35% from 30% in June, and well above the 25% odds we expected in March.
Given a lag in the release of economic data, which is often revised, it's hard to identify a recession in real time. It takes the National Bureau of Economic Research (NBER) many months to announce the start of a recession, and in case of the 2001 recession, it ended just when NBER declared that it began. But markets still keep trying to predict. There are a lot of rules of thumb that the investment community uses to signal a recession. One, backed up by a Fed study, says that when real GDP growth drops below 2% year-over-year, a recession follows within a year roughly 70% of the time. Second-quarter GDP growth was 1.6% over last year, so we have a little more time. The three-month unemployment average rate is another important indicator. Since the Second World War, if unemployment rate climbs by more than 0.3%, a recession has always followed. We would need the three-month average rate to reach 9.3%, in order to top the 8.9% trough in March, to say with more certainty that recession has started. Given the July figure edged down 0.1% to 9.1%, we still haven't arrived at that point. While a market sell-off is also watched, a plunge in stocks during the past three weeks doesn't necessarily mean a new recession (the economy avoided a recession after the stock market crash of 1987). However, amid the fragile economy, the shock of another stock market drop and resulting loss of wealth could be the tipping point.
Trying to use various rules of thumb to determine a coming recession can be dangerous. And in this case, where we have a very sluggish recovery, the normal rules may not apply. We may still be in a sustained, though weak, recovery with intermittent declines bringing the growth rate so close to zero, which would imply that the economy is falling into recession. But the signals are disturbing, and at a minimum they show an economy with very feeble growth prospects.
With the odds of a double dip at 35% and climbing every time stock market sells off, credit spreads widening, and consumer confidence dropping, when does a double dip becomes the most likely outcome for the U.S.? As the recovery is on a precipice, there are a few things to watch. Another shock to the economy, even a mild one, could push the recovery back into recession. We'd watch whether the deterioration in financial conditions persists or if leading economic data worsen. Another plunge in the stock market, a deeper contraction in already weak consumer confidence levels, one more spike in initial claims that holds, or sub-50 ISM readings for several months would push the recession gauge to the brink.
It's Only Just Begun
Why are we surprised that in the aftermath of the worst recession since the Great Depression the recovery would also be slow and uneven? As history has shown, financial crises are often followed by prolonged recessions, which is followed by a long bout of sub-par growth. Several studies measure just how much damage a financial crisis can cause and how long it can last. According to these studies, recoveries from financial crises are typically a hard climb. The economic growth will be slower than normally expected and won't be felt as a recovery by most.
The McKinsey report (Debt and deleveraging: The global credit bubble and its economic consequences, 2010) found 45 episodes of deleveraging since the Great Depression, of which 32 followed a financial crisis. The types of deleveraging the report documented included "belt tightening," massive defaults, high inflation, or "growing out of debt" (through strong economic expansion, a war, or a "peace dividend"). The report found that the most common type of deleveraging after a major financial crisis is the "belt tightening" scenario, which is what the U.S. is now experiencing.
The McKinsey report said that if today's economies were to follow that path, they would experience six-seven years of deleveraging where the debt-to-GDP ratio falls by about 25%. As the debt is paid down, GDP growth could be slower than it would have been otherwise, unemployment consistently high, and inflation low (or deflation for some), which unfortunately sounds all too similar to our current situation. 
A paper by Carmen M. Reinhart and Vincent R. Reinhart (After the Fall, 2010) put numbers to the news. According to their study, during the decade following a severe financial crisis, real per capita GDP growth rates were "significantly lower" with the median post-financial crisis GDP growth declining about 1% in the five advanced economies. The study also found that in the 10 years following a severe financial crisis, unemployment rates are significantly higher than in the decade preceding the crisis, with the median unemployment rate for the five advanced economies of about 5% higher. They wrote that "In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis levels, not in the decade that followed now through end-2009." These depressing results support our expectations that the U.S. unemployment rate will remain above 8.5% through 2013 and not reach the estimated 5.5% natural rate for another 10 years.
What's Left In The Tool Box?
In a sharp departure from the usual protocol, the Federal Open Market Committee (FOMC) last week assigned a time frame to its "extended period" phrase. While the statement had the usual caveats, which gives the Fed a way out, it indicated that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." Nevertheless, it's important to note that there were three dissenters to that opinion, which could lead to an interesting struggle between the doves and hawks for the remainder of 2011. In addition to the Fed's pledge to essentially offer free money to markets for a few more years, the FOMC went on to say that it "discussed the range of policy tools available…" to strengthen the recovery, and "is prepared to employ these tools as appropriate."
The statement noted that the Committee "now expects a somewhat slower pace of recovery over coming quarters" than it did before. The FOMC also finally indicated that not all the weakness in economic growth was transitory. And to no one's surprise, the Committee said that downside risks have increased, suggesting that more easing is likely. We expect no rate hike from the Fed before 2014. Since the Fed has already played its best hand, it will likely attempt another program of quantitative easing similar to the last one, possibly later this year. Both measures should boost financial conditions, though they will only modestly support the economic growth. They will, however, prevent the risk of slipping into outright deflation. Given that the Fed has fewer effective ways to stop deflation but has numerous ways to tighten policy, the Fed will likely project the outlook to remain weak and fight deflation.
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because the gvt will post mil at every corner and provide a bounty in new script to anyone that turns in gold hoarders.
You think BinLaden was enemy1 just wait.
I'm just saying. Is death in exchange for a chance at wealth really the worse alternative to being locked in a gulag for decades and decades?
More importantly. How many ukranian wives will an ounce of gold buy these days?
100% Debt to GDP vaulting that much closer on GDP slowdown...makes easy math for sheeple when debt and GDP are same.
GDP growing at 2% annually ($300b)
Debt growing at 10% ($1.5T+)
And only gets worse from here and doesn't include GSE's, unfunded liabilities etc somewhere from lowball of $50T to highball of $120T.
Sustainable??? Perhaps a good question for Obama's next one on one interview? Nahhh.
And people wonder why gold only goes up...perhaps it is the mirror image of unpayable debt? Nahhh.
..
Hey Tyler. Just in case no one has told you today.. you are AWESOME! Thanks for all the great articles.
Another sign the MSM WILL OBEY Barry O's kleptocracy: MSLSD (MSNBC) reports that the U.S. debt situation "isn't so bad" compared to others. Yes, the U.S. ranks 7th in highest debt-to-GDP ratio behind...Japan...Greece...Ireland...Italy...Iceland...and Portugal!
And that's the state of journalism - in the tank so far that factual evidence argues completely against the pre-fed talking point headline. Shall we all just write about the way we think things ought to be?
http://www.msnbc.msn.com/id/44151137/ns/business-world_business/
Amazing - US isn't so bad...of those on the list ahead of US, 4 have gone bankrupt and are in bailouts (G, Ire, P, Ice), one is now on the verge of breakdown and in need of proping to maintain bond market (Italy) and that leaves just US and Japan. And we are in a race to destroy our currency, (likely to destroy Japan in the process) so we can claim the ability to "pay our bills".
Yep, looks good.
yeah it's a hoot and all that in light of the global supercop meme.
bwahhhhaaaaaaaaaaaaaaaaaaaa
Well, so much for those conspiracy theories suggesting that S&P is now acting on behalf of and at the request of the government, which is merely looking for excuses to explain inevitable market responses to its actions. Unless of course, the inevitable outcome they anticipate is a total collapse of the financial system. Suicide or homicide, which one is it? Does it really matter in the end?
Yall do know that any hints of reality from the likes of the S&P's out there can be traced back to pressure coming from people that read Zero Hedge etc... The only reason anyone even bothers to read their shit is to keep up with the counterintelligence they are spitting out to the public. http://www.youtube.com/watch?v=UO5bs4WY_WI
Veeery interesting, this sudden about face is open to many interpretations - Occam's Razor, anyone?
S&P Downgrades Depository Trust & Clearing Corp
http://www.securitiestechnologymonitor.com/news/dtcc-downgrade-28603-1.html
The Illuminati's Secret 20 Trillion Dollar Bank
http://www.marketoracle.co.uk/Article26246.html
The queen is trying to scare the fed into giving her more money.
The problem is bigger than you dummies at the fed think...give HM's banks more free money before it's too late.
...and cut the lifelines to your citizens.
Fuck Standard & Whore's
They're too late to the party to matter. We all know the whole system is fucked, and virtually all debt is in peril. That which isn't, ain't far behind.
Put the scumbags out of business
Glass-Steagall
S&P will announce moving its corporate headquarters to Dubai on Halliburton Avenune... In 3-2-1...
Why are people always looking for a "way to fix things"? Sometimes you have to have hard times. Live with it.
Sure, we hate it. Sure, it sucks. But why try to "fix" something that is cyclical? Doesn't that just make it more of a broken system?
"Look for S&P to make the FBI's most wanted list very shortly."
No sir. Not until after the plane has slammed into the Treasury building, which act, in fact, the fraud-rife, criminally complicit, and treasonous S&P plainly ventures with its pinnacle demonstration of dangerous incompetence via its Treasury downgrade.
The rubber will meet the road if the GDP numbers really do follow S&P guidance. That really will tighten the thumbscrews on Moodys and Fitch to follow suit.
The big question is the the effect of economics on the 2012 election.
What if S&P is "pulling the pin" on this financial collapse. If the radicals mobilize to stir up civil unrest heading into the election in an effort to foment chaos. Instability might be a pretext to subverting the election process?
On the other hand, maybe they "put the mask back on" and bring Hilary in to run against BHO in the Dem primary? She could be a moderating force and steps in as the "voice of reason". Then she continues down th road to globalism at a slower pace. They would retain control and knowing that we were not quite a ripe to go over the cliff as they thought.
Don't forget that S&P has dirt on all the players from 2006-2008. The toxic waste which was rated AAA? S&P can point fingers and provide emails, in exchange for lessor charges and immunity for their (current) top officers.
Now that The Bernank is unlikely to go vacationing in Texas, a Texan family's past activities need to be investigated. In my lifetime I'd like to see the Bushes, the Bens, The Green spank, the Cheneys to experience the dungeons. Along with Clinton, they are responsible for millions of innocent lives lost, billions of people living with zero confidence in the political system. These handful of maniacs have destroyed the lives of millions in the US and the American people take it without a word of protest? I find that strange. Why are they allowing themselves to be brainwashed by criminals? Is it fear? Fear of what?
I am sure there are more idiots walking the earth these days when compared to 1998.
http://blogs.wsj.com/marketbeat/2011/08/12/sec-asking-about-insider-trading-at-sp-report/
according to the 2006 Credit Rating Agency Reform Act, S&P could have its license revoked if it leaked word of the downgrade: