According to the US Federal Reserve, the American economy is unlikely now to slip into recession. This comes as the International Monetary Fund upgraded its forecasts to also reflect this but warned the economy will likely “stagnate” in the second half and there wouldn’t be any real improvement until well into 2009.
Recession or slowdown: the difference is semantic.
The US Federal Reserve starts a two day policy-setting committee meeting tonight that will finish with a warning about inflationary pressures, but no move to lift US interest rates. Consumer spending is slowing and will continue to run at low levels, while inflationary pressures across the economy drive up costs, threatening sales, profits and jobs.
However, a Merrill Lynch report has warned investors not to be mislead by signs of an apparent turnaround:
Given that our economy has always relied heavily upon the consumer, we find it hard to believe that this will be an “average” recession when it appears that the consumer continues to weaken.
No one knows where the bottom is and how long it will last and the Fed’s own forecasters have consistently overestimated growth and the impact interest rates cuts would have on economic activity. In fact the Fed missed the significance of the subprime mess and its spread into other areas of the economy.
Figures out tonight will confirm there’s no relief for US home owners from sliding house prices. The Case-Shiller home price index is expected to show another decrease in US house prices in the 20 major metro markets: analysts reckon the rate of fall will rise to 15.4% in May from 14.4% the month before.
Figures for new and existing home sales for May are expected to go different ways: a small rise for existing home sales on Thursday, a fall for sales of completed new homes tomorrow night. That will further delay the chances of a recovery and add to the strength of the message from Merrill Lynch’s strategists, and not from the Fed.
While the threat from a credit crunch has eased, the feeling of doom and gloom won’t go away: US bank and financial shares are still falling, especially regional banks. Some analysts reckon US bank stocks are in a capitulation phase as the fall without reason in some cases: that applies to Australian bank shares at the moment as well.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Goldman Sachs issued an investment update in which strategists apologised for upgrading financial and consumer shares in May. Goldman now reckons that was poor advice and says stay away and stay underweight.
The giant transport group, UPS cut its latest earnings forecast by more than 10%, echoing a similar move by its big rival, FedEx last week. Both are considered good indicators of the wider economy, especially the ecommerce sector.
United Airlines announced overnight that it will cut 950 pilot jobs in its capacity cuts.