Pages

Growth recession launches QE2

- "After salami-slicing our forecast in recent months, we are ready to make a deeper cut. We now expect a growth recession: we think the economy will manage to post positive headline GDP numbers, but this growth will not be fast enough to keep the unemployment rate from drifting higher. We expect below-trend GDP growth in each of the next four quarters, and with a gradual rise in the unemployment rate above 10%. With the weaker growth, we believe the Fed will launch QE2—a new asset buying program—in Q1 of next year. Our interest rate team expects this to push 10-year yields below 2% in the early part of the year."
- "Recent data show a steady deceleration in growth. After surging in the first few months of the year, the two most important monthly indicators—private payrolls and core retail sales—have stalled (Chart 1). At the same time the post-tax-credit housing hangover has been worse than expected, and even the business equipment recovery shows signs of faltering. Our sense is that the growth recession is already here and it is likely to linger through the first half of next year."
- "For 2010, our full-year GDP forecast has been sliced 0.1ppts to just 2.6%. For 2011, we have shaved growth 0.5ppts to just 1.8%."
- "The downward revision comes from weaker anticipated spending from both consumers and businesses. With business confidence weakening and the economy slowing, we took our 2011 capex forecast down to 7.0% from 12.0%."
- "And, given the protracted inventory overhang in residential real estate and weaker labor market, we assume a long, even more painful, U-shaped housing recovery."

Merrill Lynch Economic Commentary 20100901

No comments:

Post a Comment