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Experts Put Recession Risk at 40 Percent as Jobless Claims Stay High

By    |   Thursday, 26 August 2010 10:06 AM

Nouriel Roubini, CEO of Roubini Global Economics, told CNBC’s “Squawk Box” Thursday that the likelihood of the economy going into another recession now stands at 40 percent.

“Businesses now are retrenching, business investment based on the global growth numbers because there’s not growth in the economy and there’s no final demand… There’s weakness in the financial system,” Roubini said.

“There are still 750 banks on the FDIC essentially critical list. Half of them are going to go bust.”

Pimco CEO Mohamed El-Erian concurred with Roubini’s analysis. He said the U.S. economy has yet to figure out how to reach enough “escape velocity” to avoid a prolonged downturn.

Economists were hardly encouraged by a lackluster weekly jobless-claims report that showed the U.S. economy shedding fewer jobs than expected.

Labor Department numbers show initial jobless claims made their first decline in a month, to 473,000. At the same time, the government revised claims from the previous week upward, from the 500,000 initially reported to 504,000.

A Bloomberg survey of 48 economists Wednesday showed they had expected a report showing 490,000 jobless claims, so the jobless-claims report was better than expected. In a healthy economy where jobs are being added regularly, weekly claims usually fall below 400,000. At the height of the recession in March 2009, weekly claims peaked at 651,000.

However, a measure of underlying labor market trends jumped to a nine-month high, suggesting a subdued jobs recovery. The four-week average of new claims, considered a better measure of underlying labor market trends as it irons out week-to-week volatility, rose 3,250 to 486,750, the highest since late November, Reuters reported.

Meanwhile, the Dow Jones Industrial Average rose 25 points in early morning trading, raising hopes of a possible upturn. On Wednesday, the Dow struggled to finish in positive territory above the 10,000 mark, following four straight days of declines.

Earlier this week officials announced the lowest rate of new home-sales since record-keeping began in 1963. July sales dropped 32.4 percent, compared to July 2009.

Also durable goods orders would have fallen at the sharpest pace since January, except for a 76 percent surge in commercial aircraft orders.

Economists, who only two months ago generally were dismissive of fears that the U.S. economy could take a double-dip slide back into recession, now are considering that scenario quite seriously, although most say it is probably unlikely.

"The odds of a double-dip are rising and uncomfortably high," Moody’s chief economist Mark Zandi announced Wednesday. "Nothing else can go wrong. There is no cushion left."

That admission from Zandi was particularly ominous, given the central role his analysis played in the prediction by administration officials that unemployment would peak at 8 percent as long as Congress approved over $800 billion in stimulus.

Zandi also recently projected that U.S. unemployment would probably breech the 10 percent mark by December.

Other experts weighed in Thursday with equally gloomy predictions about the course of the economy.

Barry Knapp, head of U.S. equity strategy for Barclays, told CNBC: “The reality of it is if you look at the monthly average for jobless claims in August… they’re much worse than July. And July’s employment report was disappointing. So the trends are all pointing toward a deteriorating labor market, and it is going to be a problem.”

Many on Wall Street are openly blaming the difficulties on uncertainty generated by the Obama administration’s management of the economy.

“I attribute a lot of the deterioration to policy issues,” Knapp said, “because you look at things like the unemployment rate for people with a high school education or less has really been deteriorating, and the marginal cost of hiring those people went up with healthcare reform. So I don’t see any easy way out of this right now.”

The economists surveyed by Bloomberg expect the government later this week to revise second-quarter economic growth downward from 2.4 to 1.4 percent. That would be the slowest growth rate since the second quarter of 2009, when the economy was thought to still be contracting overall.

Roubini warned that U.S. economic growth for the rest of the year will be closer to zero than 1 percent.

Investors also are now eagerly awaiting Federal Reserve Chairman Ben Bernanke’s keynote speech Friday at the Jackson Hole, Wyo., central bankers’ symposium.

“The market’s reversed, hoping the chairman’s going to deliver some silver bullet announcement” Knapp said.

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Nouriel Roubini, CEO of Roubini Global Economics, told CNBC s Squawk Box Thursday that the likelihood of the economy going into another recession now stands at 40 percent. Businesses now are retrenching, business investment based on the global growth numbers because...
Thursday, 26 August 2010 10:06 AM
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