David Kelly, chief market strategist at JP Morgan Asset Management, is raising his odds on a U.S. recession to 25%, thanks largely to what he considers policy blunders by U.S. politicians in both parties and their counterparts in Europe. "I'd feel a lot better if policymakers went off to work on their golf games," he told attendees at a one-day alternative investments meeting in Boston that preceded the inaugural Fiduciary Gatekeepers Research Managers Summit.
Still, Kelly remarked that he thinks there is a 50% chance that U.S. GDP growth muddles along at a 1% to 3% positive trajectory and a 25% chance growth exceeds 3% over the next 12 months. Why is he more upbeat that many of his fellow economists?
Basically, because it would be hard for things to get worse. Kelly displayed charts of the four leading cyclical economic indicators of a recession-light vehicle sales, housing starts, inventories and real capital goods sales. All are in the dumps and we're still not in a recession.
Auto sales and inventories could actually pick up in the second half of 2011. Railroad traffic, another key indicator, is actually fine and initial unemployment claims aren't good but neither are they in recession territory. "We think the third quarter will be the strongest of the year," Kelly said.
Yet the psychological mood is awful, he acknowledged. "Does the fall in confidence cause a change in behavior?" he asked. "We've gone from very gloomy to very gloomier. The danger is we'll scare ourselves into another recession."
He suspects not. Savings among Americans is up and the household debt service as a percentage of income is approaching a 30-year low. "Our exports are up double-digits year over year and I think it will continue," he declared.
But blundering policymakers are compounding the crisis in confidence. Kelly had equally harsh words for Fed chairman Ben Bernanke, President Obama and Congressional Democrats and Republicans.
Bernanke's policies reminded him of his own behavior when he had the worse cold of his life for three weeks in February 2009. He kept taking Nyquil, Dayquil, any medicine he could find, as well as hot whiskey and just kept making himself sicker.
This is what Bernanke has been doing with monetary policy. His July statement that the Fed wouldn't raise interest rates until at least mid-2013 stupidly sent a signal to anyone considering buying a car or a house that they could take their sweet time and postpone purchasing decisions.
As for President Obama and Congressional Democrats, Kelly said if they had set out 30 months ago to create an environment more unfavorable and less conducive to bank lending "they could not have done a better job."