BofA Merrill sees 'growth recession' -- and another dive in interest rates
Bank of America Merrill Lynch on Wednesday downgraded its forecast for the economy, calling for a “growth recession.”
What’s that? As BofA Merrill economists describe it, the U.S. would continue to grow in the fourth quarter and in 2011, but not fast enough to generate significant employment gains.
So to many Americans (and businesses) it would feel like a recession even though the economy as a whole wouldn’t be contracting. You could substitute "jobless recovery" for "growth recession," although the latter somehow sounds more painful in the big picture of things.
The economists slashed their forecast for fourth-quarter real gross domestic product growth to an annualized 1.5% from a previous estimate of 2.2%.
They cut their full-year 2011 growth estimate to 1.8% from 2.3%.
“Recent data show a steady deceleration in growth,” BofA Merrill said, citing slowing retail sales in the last few months and the dismally weak pace of growth in private-sector payrolls. “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.”
As for the risk of another bona fide recession that would mean economic contraction, the BofA Merrill economists say the odds of that happening are relatively low -- a 25% chance.
The U.S. should avoid a “double-dip” recession, they say, because key sectors of the economy had already collapsed in 2008 and 2009 and have since barely recovered. In other words, they shouldn’t have much further to fall.
“The three most cyclical sectors -- home building, consumer durables [such as cars] and equipment investing -- remain near record lows as a share of GDP,” BofA Merrill said.
“A similar story holds for the job market: During the recession and first two quarters of the recovery, U.S. companies cut jobs and hours much more aggressively than in past recessions and much more aggressively than in other countries,” the economists said.
“The bottom line is that a lot of ‘lean’ has been cut along with the ‘fat’ in the U.S. economy, so it will likely take a bigger-than-normal trigger to restart the cutting.”
If their overall forecast is right, most people who have jobs have a strong chance of holding on to them. But the natural growth of the labor force, coupled with a lack of new job creation, still would mean that the ranks of the officially unemployed would rise.
The only silver lining in their forecast: They expect the Federal Reserve to continue to try to push long-term interest rates lower to support the economy. BofA Merrill now predicts that the benchmark 10-year Treasury note yield will fall below 2% in the first half of 2011, from the current 2.58%.
That would likely mean another dive in mortgage rates as well.
-- Tom Petruno
Photo: The scene Wednesday at the Nevada JobConnect Career Center in Las Vegas. Credit: Julie Jacobson / Associated Press