–Recent Data Beginning To Look ‘Worrisome’
–Additional Weakness In Coming Months Significantly Ups Recessn Chances
By Brai Odion-Esene
WASHINGTON (MNI) – Recent data showing a contraction in U.S. June
manufacturing activity underlines the uncertain “high-risk” economic
environment, and more disappointing data in the coming months will
“significantly increase” the probability that the U.S. slips into a
recession, ratings agency Standard & Poor’s warned Tuesday.
A report by the firm’s Capital IQ Global Markets Intelligence group
lays out two potential scenarios for the economy and markets over the
balance of 2012. The first scenario is that the economy is in the final
stages of a soft patch that began at the start of the second quarter,
with the Institute of Supply Management’s manufacturing index only
temporarily dropping to 50 level before quickly returning to the
52-to-55 range that had prevailed since the start of 2012.
The second, more bearish outlook, sees the U.S. economy succumbing
to the one-two combo of continued weak domestic disposable income growth
and economic contraction in numerous European countries that trade with
the U.S.
Economic activity in the U.S. manufacturing sector contracted in
June for the first time since July 2009, with the ISM manufacturing
index Monday coming in at 49.7 — a decrease of 3.8 percentage points
from May’s reading of 53.5. The New Orders Index plunged to 47.8,
indicating a contraction in new orders for the first time since April
2009.
“We believe the June ISM report is a potential game-changer in a
broader context, since additional weakness in months to come will
significantly increase the chances for a U.S. recession,” S&P said. “At
minimum, the recent PMI manufacturing report reinforces the notion that
we currently face an uncertain, high-risk economic and market
environment.”
The S&P analysts said that in their view, the shocking PMI report
is actually the “second strike” against the U.S. economy. They noted
that the three-month average rate of U.S. monthly nonfarm payroll growth
is now 96,000, below the 100,000 rate they believe is required to
maintain 2% to 2.5% U.S. GDP growth.
While reluctant to reach conclusions based on one report — the
analysts acknowledge maintaining a “glass-half-full” bullish outlook for
the past three years — “we have to admit that recent data are beginning
to look worrisome,” they wrote.
Up until the start of the second quarter of 2012, the U.S. economic
recovery had looked as though momentum was building to the upside, S&P
said, adding that its analysts felt the domestic service
sector-propelled economy would find a way to keep chugging along despite
shocks such as the Japan disasters and the eurozone crisis.
“We are now beginning to question the staying power of this view,
and are preparing for the day when we may need to take a much more
defensive stance on risk,” S&P said.
As mentioned earlier, the analysts currently see two potential
scenarios for the economy and markets over the balance of 2012, which
they will constantly monitor for the rest of the year.
Under the first scenario — that of an economy is in the final
stages of a soft patch that began at the start of the second quarter —
S&P said the ISM services PMI (to be released Thursday) and the Friday’s
June employment report will have to be “considerably more optimistic” in
order for the economy to follow this scenario and for GDP growth to
reach 2% to 2.5%.
Average U.S. payroll growth will also have to return back above the
minimum 100,000 level under this relatively optimistic scenario, it
added.
Under the second outlook, the report said additional “persistent”
increases in weekly U.S. jobless claims, confirmed by monthly increases
in the U.S. unemployment rate, would likely tip the odds in favor of the
U.S. recession scenario.
“Rising unemployment would represent the third strike against the
economy,” S&P warned.
** MNI Washington Bureau: 202-371-2121 **
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