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Odds of U.S. recession top 50%: Federal Reserve study

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Fed study raises recession threat New research from the Federal Reserve suggests the odds of another recession in the United States are now greater than 50 per cent, largely because of the European debt crisis.

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In a study published today, Travis Berge of the Federal Reserve Bank of Kansas City and Early Eilias and Òscar Jordà of the Federal Reserve Bank of San Francisco look at the odds of recession because of domestic factors and the odds linked to international developments.

"The combination of these two recession coins ... is quite disconcerting," they said.

"It indicates that the odds are greater than 50 per cent that we will experience a recession some time early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession."

However, their model suggests that the threat of severe damage eases quickly "if we navigate the storm through the second half of 2012.

Based on its own economy, the United States faces a 30 per cent threat of recession, the paper says.

The researchers also address the "so what" issue, suggesting some may find dating recessions as "little more than an academic exercise" when millions can't find jobs during a recovery.

"However, identifying business cycle turning points is useful," they say.

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"From an operational viewpoint, predicting a binary outcome - recession or expansion - over a long forecast horizon is easier than predicting GDP. Moreover, certain variables, such as leading economic indicators, offer insight into recession odds in the distant future. If economic policy is to be preemptive rather than reactive, it is important to get ahead of the curve."

Japan's economy grows Japan's economy has rebounded from the devastation of the earthquake and tsunami in mid-March, the latest reading shows.

The country's Cabinet Office said today the economy grew at 6 per cent, annualized, in the third quarter, finally climbing back from the horror of earlier this year.

"While this is encouraging following the major disasters that plagued Japan in early spring, there is still much uncertainty for the future as the high yen has hurt profits while the flooding in Thailand has reduced auto production once again given parts shortages," said Derek Holt and Karen Cordes Woods of Scotia Capital.

Italy, Greece in spotlight Silvio Berlusconi and George Papandreou put a bit of a spark in the market with their decisions to resign, but that's eroding as reality sets in.

The new leaders in both embattled countries, Mario Monti and Lucas Papademos, are scrambling to boost confidence, but the initial results aren't that strong.

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Italy, for example, still paid a high price in its first test of the market since Mr. Monti's appointment, selling five-year bonds in an auction today with a record yield of 6.29 per cent.

There's also the issue of Mr. Berlusconi and his party.

"Next up Mr. Monti has to name a cabinet and seek a vote of confidence from Parliament (expected by midweek)." said Elsa Lignos, currency strategist at RBC in London.

"That would mean a new government could be operational by the end of the week. But its ability to act is somewhat constrained - Berlusconi's party indicated on Sunday that they expect the technocrat government to just implement the measures voted through over the weekend and there are no illusions about Berlusconi taking a back seat. This is a man who has been in and out of the PM's seat since 1994, and he told supporters 'tomorrow I will redouble my efforts in parliament … to renovate Italy.'"

In Greece, Mr. Papademos was scheduled to unveil his new policies today, and the New Democracy party has warned that it won't support any new austerity measures.

Buffett keen on IBM Warren Buffett has quietly assembled a stake in IMB Corp. of about 5.5 per cent.

Mr. Buffett told CNBC today that his Berkshire Hathaway Inc. acquired some $10.7-billion (U.S.) of IBM shares this year, citing the "incredible job" the company has done in its strategy for the future.

This is a departure for Mr. Buffett, who has traditionally shied away from technology investments, and a big vote of confidence for IBM.

Where's the floor? UBS Securities Canada analysts take an in-depth look today at shares of Research In Motion Ltd. , raising the key question for the BlackBerry maker's stock: Where is the floor?

"We remain on the sidelines on RIMM as we continue to find the investment case still fraught with risks," said analysts Phillip Huang and Amitabh Passi, referring to the company by its U.S. stock symbol and noting that the shares have been cheap for some time.

"In early June we had pegged our downside case at $26-29/share. Since then the stock has crashed through our range and like many investors we have been reassessing our investment thesis and trying to identify a potential floor for the stock," they said in a research report titled "Where is the floor?"

"Fundamentally, our challenge has been, and remains, assessing normalized earnings power for the company especially given its waning momentum in the marketplace and potential risk to its services revenues (fees per subscriber)."

RIM took it on the chin after its last earnings report, though its new BlackBerry 7 models, which have met with decent reviews, were too late to have an impact. It reports third-quarter results in mid-December.

The UBS analysts slightly ratcheted down their forecasts for shipments in 2012 and 2013, and looked at scenarios for which the stock could sink much lower or surge much higher, the latter including a successful transition to a new operating system, any "modest reversal of extreme negative sentiment" and management and board changes.

"By analyzing and interpreting RIMM options that expire on June 16, 2012, we note that they are implying an approximate range for the stock of around $10-$25, by mid-June 2012," they added.

"From one perspective, a case can be made that options are pricing in a 30-per-cent chance that the stock increases to $25 and a 40-per-cent chance that it decreases to $10."

Whatever, they believe that $18, around the current range, is "not likely the right price for this company." Their 12-month price target on the stock is $26.

Cameco tops Rio in bid Canada's Cameco Corp. has topped a friendly deal by Rio Tinto PLC with a sweetened hostile bid for Hathor Exploration Ltd.

Cameco today boosted its offer to $4.50 in cash, valuing the company at $625-million, The Globe and Mail's Brenda Bouw reports.

That's a 20-per-cent increase from the uranium giant's first all-cash offer in August.

What to watch for this week A Canadian Real Estate Association report this week is expected to show a softening in the housing market in October, but still nothing to sneeze at. "The Canadian housing market looks relatively balanced overall, but sales likely cooled in October as consumer confidence fell to the lowest level since May, 2009," said Robert Kavcic of BMO Nesbitt Burns. "Existing home sales should be about 8 per cent above year-ago levels in the month, down from a near-16-per-cent year-over-year pace in August and 11 per cent year-over-year in the prior month. Average prices were likely up about 5 per cent year over year."

Several major U.S. retailers report quarterly results, including Home Depot Inc., Stapes Inc., TJX Cos., Wal-Mart Stores Inc, Target Corp., Gap Inc., Sears Holdings Corp. and Abercrombie & Fitch Co. In Canada, major earnings will come in from the likes of Loblaw Cos. and Metro Inc.

Economists expect Statistics Canada's inflation report on Friday will show that consumer prices were just about flat in October. They expect the report to show prices were little changed from September, though the annual rate may dip to a range of 2.7 per cent to 3 per cent from September's 3.2 per cent. The core rate is expected to fall to 1.9 per cent from 2.2 per cent. "The recent acceleration in both headline and core inflation is expected to have reversed course in October due in part to lower commodity prices, slowing economic momentum, and an unwind of several temporary factors that had previously pushed prices higher," said economists at Toronto-Dominion Bank.

Smart, dumb and arguably funny 1. German Chancellor Angela Merkel's Christian Democratic Union held its conference today in Leipzig, where delegates were given an orange to mark the party's colour. But, Reuters reports, the security types quickly took them away lest anyone decide to throw them at the German leader.

2. Ms. Merkel's party also voted to allow countries to opt out of the euro zone, though her coalition partners also have to agree. Here's what Finance Minister Wolfgang Schaeuble told an interviewer: "We're not throwing anybody out. But if a country can't carry the burden or doesn't want to carry the burden, and the Greek people have to carry a heavy load, then we have to respect the country's decision." (Translation: What's the rush? Here's your hat and coat.)

3. From today's Supplementary Estimates from the Office of the Parliamentary Budget officer: "Given that more than half of the fiscal year has passed, parliamentarians may wish to solicit further details from those organizations currently implementing Strategic Review reductions. In particular, those who have yet to provide any details." Well, yeah.

4. Leon's Furniture Ltd. today boosted its quarterly dividend to 10 cents from 9 cents. This is the retailer, of course, that's known for its Don't Pay a Cent Event. (It also declared a special dividend of 15 cents a share.)

5. Here's what Hochtief, the big German construction company, said today in its third-quarter earnings report: "In the roads segment, the economic crisis in Greece and persistent mass toll dodging led to major shortfalls in income development for the toll road projects Maliakos-Kleidi and Elefsina-Patras-Tsakona. Greek government and the private operator consortia negotiations for a long-term viable solution are ongoing."

6. Best tweet of the day, from @CarolynKing: "Since I rarely get my hands on the old $100 bills, I wonder when I'll get a chance to hold the new polymer banknote."

Business ticker

In Economy Lab Any progressive income redistribution policy is inspired by Robin Hood in that it involves taking from the rich and giving to the poor, Stephen Gordon writes. But that might irk the median voter, and no political party wants that.

In International Business Europe should use its own resources to resolve its debt crisis before other countries contribute, Canada's Finance Minister Jim Flaherty said today in Beijing.

In Globe Careers

When one's life isn't in balance and work has totally taken over, the passion for your job can become obsessive and counterproductive, says Harvard Business Review.

In Personal Finance Your 30s can be a trying time financially. Here are some tips to help make it work.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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