US economy is not heading towards recession

At least for now, the US economy is not heading towards a recession despite forecasts from some Wall Street economists. The most bearish forecasts came again from Goldman-Sachs’ team. Some weeks ago, we argued that one important factor for a US recession has not emerged and would be very unlikely to emerge, an inverted yield curve of US Treasury paper. The flight to safe havens and the announcement of “Operation Twist” by the Fed has pushed the yield on 10yr US Treasury notes to record lows and thus, the yield curve flattened. However, as the Fed keeps the Fed Funds target rate at the current level of 0.0 – 0.25% until the middle of 2013, an inverted yield curve is rather unlikely.

A major factor for the fear of a US recession had been US statistics. The financial and commodity markets were already nervous due to the political wrangling over lifting the debt ceiling, when US statisticians revised four years of GDP statistics downward. However, the market participants completely overlooked that GDP growth in Q2 remained below expectations but was above the revised growth in the preceding quarter. There is a saying “there are lies, damned lies and statistics”. But even worse appear to be US statistics, especially for the labor market. In September, the markets got spooked by the non-farm pay roll figures, which came in flat and the two previous months had been revised down. Last Friday, the non-farm payroll figure surprised to the upside by creating 103K new jobs in September, while the consensus of economists was looking only for an increase by 55K. However, also the figures for July and August had been revised up. Instead of no new jobs, the revised figures show now that 57K jobs were added to the payrolls in August. The pace of creating new jobs is still too slow to reduce the unemployment rate. However, it is not pointing towards a recession of the US economy. Therefore, more monetary stimulus remains still on the agenda of the FOMC meetings.

The survey indices of some regional Federal Reserve Banks plunged over the summer months. This had also an impact on the index of purchasing managers. The ISM index for the manufacturing sector dropped from 55.3 in June to 50.9 in July and many economists already predicted a fall below the 50 threshold in August. However, the manufacturing PMI only declined to 50.6, which was already a positive indication. In September, the PMI reversed direction and rose again to 51.6, which indicates that economic activity in the manufacturing sector is increasing again after the summer vacations.

Nevertheless, the US economy is not yet out of the woods. A major threat is the debt crisis in the eurozone. After reaching a compromise in July, eurozone finance ministers now talk about a bigger participation of the private sector in a bailout of Greece. Also discussions of a Plan B, i.e. a default of Greece and shielding other eurozone countries and banks, move towards centre stage. The major problem in dealing with the debt crisis is that politicians rule out sound instruments for obscure ideological reasons. Thus, politicians will always be one step behind the markets and can only react instead of acting strongly and impressing the markets.

A positive development was also noticed in the recent CFTC report on the “Commitment of Traders”. After two months of declines, the net long position of large speculators in gold futures rose again. Compared with the week before, the non-commercials added 5,355 new contracts to there net long position in the week ending October 4. Thus, the net long position rose to 133,156 contracts. However, in silver, the large speculators reduced the net long position further to a mere 11,900 contracts.

The improved US economic data indicates that the risk aversion of investors might not increase further but is more likely to decline again. This would be positive for the precious and the base metals. However, the debt crisis in the eurozone is a factor that keeps uncertainty at a high level. Therefore, any decline of investors’ risk aversion is probably only gradually. Against this background, we expect that precious and base metals are likely to stabilize. The bias is likely to shift towards higher prices. However, as long as no convincing solution of the eurozone debt crisis is found, we do not expect a strong upward move of metal prices. In the worst case of a Greek default, gold might profit as a safe haven, but other metal prices might plunge again.