Markets await U.S. payrolls to read recession runes

LONDON Thu Oct 6, 2011 12:25pm EDT

LONDON (Reuters) - Friday's U.S. jobs data will be fresh grist to the mill of analysts hunting for signals that the world's biggest economy might, contrary to most evidence, be tipping into recession after months of sluggish growth.

Payrolls have signposted the last three recessions. Specifically, history shows that a recession has begun or is imminent when the six-month gain in payroll employment drops below 0.5 percent, according to Kevin Logan, HSBC's chief U.S. economist.

So far, the reading has stayed out of the danger zone. The six-month change in August was 0.7 percent, down from 1.0 percent in April.

"Recessions are about declines in production and the loss of jobs. There is no more reliable indicator of the onset of a recession than a downturn in the growth of employment," Logan said in a report. "Recent job gains may have been lackluster compared to other economic expansions, but they have been positive nonetheless."

LOOKING FAR AND WIDE FOR CLUES

In contrast to the employment data, some traditional gauges have lost their usefulness as leading indicators.

An inversion of the yield curve, measuring the difference between the yield on 10-year notes and three-month bills, has historically been a sure sign of recession. The curve currently slopes reassuringly upward, but only because the Federal Reserve has cut short-term interest rates close to zero.

The Fed's regional banks are the source of two other indicators attracting attention. When the three-month moving average of the Chicago Fed National Activity Index falls below -0.70 percent, it is increasingly likely that a recession has begun, according to economists at Royal Bank of Scotland.

The three-month average held steady in August at -0.28 percent, indicating continued, if below-trend, expansion.

Ajay Kapur, an equity strategist for Deutsche Bank in Hong Kong, looks at the Philadelphia Fed's "Anxious Index," which is based on a survey of economic forecasters.

The third-quarter reading was at 20.9 percent, showing respondents saw a 20.9 percent chance of recession in the October-December quarter. Out of the eight times when the reading has exceeded 30 percent, recession has ensued on seven occasions, Kapur said.

So far, so comforting, except that out of the 11 times the index has crossed the 21 percent threshold since 1968, a recession occurred within 12 months on seven occasions.

"We will take the current 21 percent probability as a deep orange signal, not fully a red flag," Kapur said in a note.

QUESTION OF CONFIDENCE

Policymakers, of course, scour spreadsheets as intently as market economists, and they are responding to the rising risks they see.

The Bank of England said on Thursday it would pump money into the economy by buying 75 billion pounds of government bonds. [ID:nL5E7L627B]

The Fed expects to keep short-term interest rates near zero until 2013 and is tweaking the mix of its securities holdings to drive already low long-term rates even lower.

And in the euro zone, the increasing urgency behind the search for a way out of the bloc's debt crisis is driven in part by a recognition that banks' difficulties in accessing funding markets is sapping confidence and choking off credit.

"What is prompting action from policymakers in the euro zone is these poor financial conditions for banks and the fact that they are feeding into a deteriorating growth outlook," said Ebrahim Rahbari, an economist at Citi in London.

That deterioration is captured in an index produced by Absolute Strategy Research (ASR), a London consultancy, based on the balance of positive and negative macro news reports.

The September index for the euro zone dropped to 47.4 from 51.1 in August.

But the firm's global composite newsflow indicator, which shows a good fit with J.P. Morgan's purchasing managers' index for manufacturing, fell only modestly last month to 52.9 from 53.5, consistent with a material slowdown but not an economic downturn.

"Corporate news flow was still pretty robust in August and September, all things considered," said David Bowers, ASR's joint managing director. "Corporate confidence is now crucial in preventing a financial crisis from turning into another recession."

On that score, a survey released on Thursday by Grant Thornton International, a business advisory group, makes grim reading.

Net business optimism across the euro zone slumped to just 2 percent in the third quarter from 37 percent in the second quarter as uncertainty over the area's debt crisis eroded confidence and hit order books.

"Greater stability across the euro zone is crucial to encouraging investment, which in turn will boost business growth," said Ed Nussbaum, the firm's chief executive. "The key message from our research is that a lack of coordinated action is damaging business growth prospects."