by Calculated Risk on 11/11/2011 01:41:00 PM

Yesterday I commented that I thought Europe was probably already in a recession. Since then I have received a number of questions about this comment, especially asking about a recession in the U.S.

First, I do not follow Europe nearly as closely as the U.S., and I was just reacting to the European Commission report that the “recovery in Europe has come to a standstill”. My recession comment was just a guess based on stories out of Europe, and my level of confidence is not very high. So take my comment for what it is worth - very little!

Second, my best guess is the U.S. stays out of recession even if Europe is currently in a recession. Of course there are significant downside risks, especially if there is a disorderly end to the euro.

If we look at the channels of contagion, it seems the impact from Europe – barring a blow-up – will be fairly small. Of course, with sluggish growth, the U.S. is very susceptible to economic shocks, and it also appears that the U.S. is moving to more austerity in 2012 – and that is an additional concern (If Congress does nothing, taxes will increase on working Americans, and more).

What are the channels of contagion from Europe? First, the trade channel – the impact on U.S. exports – is pretty small. Although Europe is a major trading partner, exports only make up a small portion of U.S. GDP. Some of the impact from trade would probably be offset by lower oil prices – and of course lower interest rates as investors seek safety (the European crisis is a key reason the U.S. 10 year bond yield is around 2%).

A more significant channel would be tightening of U.S. credit conditions in response to the European crisis. That is why I looked so closely at the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices that was released on Monday. The survey showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (although lending standards are already pretty tight).

Another possible channel of contagion is less European lending to emerging markets and a slowdown in those economies – and then fewer exports from the U.S. to those emerging markets. This is possible, but we haven’t seen any evidence of this yet. And if emerging markets slowed sharply we’d probably see an offsetting sharp decline in oil prices (hasn't happened).

So, right now, I’m sticking with my general forecast for sluggish GDP and employment growth in the U.S.

by Calculated Risk on 11/11/2011 09:55:00 AM

The preliminary November Reuters / University of Michigan consumer sentiment index increased to 64.2, up from the October reading of 60.9, and up from 55.7 in August.


Click on graph for larger image.

Consumer sentiment is usually impacted by employment (and the unemployment rate) and gasoline prices.

Gasoline prices have declined about 50 cents per gallon from the highs in early May, but prices are still well above the levels of early this year. And the unemployment rate is also very high at 9.0%. Both negatives for sentiment.

In addition, sentiment was probably negatively impacted by the debt ceiling debate in August. Back in August I looked at event driven declines in consumer sentiment. If this decline was "event driven", then we should have seen little impact on consumption (looks correct) and a bounce back fairly quickly, but only to the already low levels of June and July. It looks like we are seeing some bounce back.

However sentiment is still very weak, although above the consensus forecast of 61.5.

by Calculated Risk on 11/11/2011 08:42:00 AM

Below is a table for several European bond yields (links to Bloomberg).

From the WSJ: Italian Senate Approves Budget Bill

Italy's senate approved the 2012 budget law Friday, paving the way for parliament to vote on the bill this weekend and for Prime Minister Silvio Berlusconi to resign. ... The government has scheduled a final cabinet meeting Saturday at 1700 GMT, or as soon as the parliamentary vote is completed.

The speed of the cabinet meetings suggests Mr. Berlusconi is collaborating with the national plan, backed by the head of state, to try to install a new emergency government before markets open on Monday.

The Italian 10 year bond yield has declined to 6.59%.

The Spanish 10 year bond yield has increased to 5.89%. The Spanish 2 year yield is up to 4.74%.

The French 10 year bond yield has increased to 3.48%.

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

by Calculated Risk on 11/10/2011 08:36:00 PM

New temporary PMs for Italy and Greece, a new European economic forecast (that is too optimistic, I think Europe is already in a new recession), and S&P goofs ...

From the NY Times: A Shaken Italy Is Poised to Name a New Government

Italy pulled back from the brink on Thursday, as lawmakers seemed poised to usher out Prime Minister Silvio Berlusconi and replace his government with a cabinet of technocrats most likely led by a former European Commissioner, Mario Monti.
...
Mr. Berlusconi was hoping to buy himself more time in power. But now, with the Senate expected to approve the measures on Friday and the Lower House on Saturday, Mr. Berlusconi is expected to step down by Monday.

Asked what had sped up the process, Stefano Micossi, an economist and the director of Assonime, an Italian business research group, put it simply: “The view of the precipice.”

From the Athens News: Papademos confirmed as new PM

... the former ECB vice-president [Lucas Papademos] was confirmed as the country’s next prime minister.

The formalities of the resignation of outgoing ministers and swearing-in of the new government are expected to be completed on Friday, with a view to the holding of vote of confidence in parliament possibly as early Monday.

"The Greek economy is facing huge problems despite the efforts undertaken," Papademos said in his first public remarks. "The choices we will make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

From the NY Times: Europe’s Growth Forecast Is Lowered

Europe’s economic outlook received a fresh dose of gloom Thursday, when the European Commission warned that the Continent’s economies were stalled and faced the risk of a double-dip recession.
...
“The recovery in the European Union has now come to a standstill, and there is a risk of a new recession,” Olli Rehn, the European commissioner for economic and monetary affairs, told reporters in Brussels.

“This forecast is in fact the last wake-up call,” he added.
...
Even Germany, the economic engine of Europe, is now expected to record just 0.8 percent growth in 2012 — more than a percentage point lower than the European Commission predicted in its spring forecast. And none of the euro zone’s other three biggest economies — France, Italy and Spain — are projected to achieve 1 percent growth in 2012.

I think Europe is already in recession.

And from Bloomberg: S&P’s Faux Pas on French Rating Roils Markets

Standard & Poor’s roiled global equity, bond, currency and commodity markets when it sent and then corrected an erroneous message to subscribers suggesting France’s top credit rating had been downgraded.

by Calculated Risk on 11/10/2011 05:16:00 PM

From the FDIC: Century Bank of Georgia, Cartersville, Georgia, Assumes All of the Deposits of Community Bank of Rockmart, Rockmart, Georgia

As of September 30, 2011, Community Bank of Rockmart had approximately $62.4 million in total assets and $55.9 million in total deposits. ... The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $14.5 million. ... Community Bank of Rockmart is the 88th FDIC-insured institution to fail in the nation this year, and the 23rd in Georgia.

It feels like Friday!