Yesterday, when we reported about Goldman not one, but two GDP Q1 forecast cuts in one day, we said to "watch for the Wall Street lemming brigade to quickly follow in Goldman's footsteps." Sure enough, here is Bank of America, rushing first into the bandwagon, trimming its Q1 forecast from 2.2% to 1.8%. This is perfectly expected: recall that from day 1 of 2012, most banks had been pushing for QE3, ignorant of the massive liquidity tsunami that was going on behind the scenes. Well, the impact of that has now come and gone, with no more easing from the ECB on the horizon for a long time. Which means that the focus can again shift to how "bad" the US economy is in preparation for the inevitable Bernanke gambit. Needless to say this will make the pre-election economy appear like a total farce in the months before the re-election: soaring employment and plunging everything else. Good luck explaining that away. Incidentally explains why the EURUSD has resumed its slide: the market is now pushing Bernanke to halt the appreciation of the USD against the EUR, and thus the implicit benefit of German's economy over that of the US, which can only happen with further promises of easing. That said, we can't wait for the statement as the vaudeville Trio of Bianco, Chadha and of course LaVorgna to follow suit and slash their now comically hyperbolic expectations.
From Bank of America
While we are quite concerned about second-half growth, we expect continued mixed news in the near term. Four fair winds are supporting growth: the fading shocks from the Arab Spring; the rebound in Japanese-related manufacturing after last year’s tsunami; reduced home foreclosures as banks wait for clarification on the rules; and mild winter weather. On the back of a very weak consumption report, we have lowered Q1 GDP growth from 2.2% to 1.8%. However, the early data for February has been healthy: although the national PMI weakened, jobless claims continue to drift lower, measures of consumer confidence continue to rebound and auto sales inched higher (Table 1). In the week ahead, we expect more of the same, with a solid 215,000 reading for February payrolls.
Unfortunately, the winds are starting to shift. In the spring the weather is much less important to economic activity than in the winter. Hence, the mild-weather induced bump up in the data should fade. Gasoline prices are up roughly 50 cents from their December lows and with the usual lags this could impact spending (Chart 1). The Attorney General Agreement in February paves the way for a ramp up in foreclosures over the next several months, dampening home prices and potentially construction. And the recovery in the auto sector now seems complete, suggesting a return to a slower pace of growth in sales and production. Based on these cross winds, we expect the data surprises to turn negative over the course of this spring.
When the facts change…
A popular indicator among clients is the Economic Cycle Research Institute (ECRI) leading index. Back in September ECRI argued that a recession was “inescapable,” pointing not just to their publicly released index, but to a series of other proprietary indexes. “Once the [negative] feedback loop starts,” they warned, “it’s more powerful than any policy response.” In the past week, they were back on the airwaves, saying “our call stands”: a recession is still likely in the first half of this year. Indeed, they argue, “when you look at the hard data that is used to officially date business cycle recessions, it has been getting worse, not better, despite…the consensus view of an improving economy
Risk of recession rises in the second half
The deterioration in leading indicators last summer was mainly because of waves of financial market stress coming from Europe and weak US data due to the oil and Japan shocks. Those shocks have now faded and the risk of a near-term recession has in our view fallen back to normal levels. Unfortunately, we believe the risk of a recession rises in the second half. The sudden stop in fiscal policy at the end of the year will likely cause a sharp slowing in growth. If it is handled badly, it could cause an outright recession. However, this has nothing to do with the now out-of-date signals from last fall.