Clouds over Jackson Hole

By Pedro Nicolaci da Costa

WASHINGTON (BestGrowthStock) – For a country that has earned a reputation for no longer producing very much, the fate of the world economy is still curiously dependent on the fortunes of U.S. workers.

A renewed spike in U.S. unemployment could spell trouble for the global economic recovery and spark a fresh push into unconventional monetary easing from the Federal Reserve, affecting everything from a frothy yen to fast-growing emerging markets.

The Fed’s yearly pow-wow at Jackson Hole, Wyoming this week will take place against the backdrop of U.S. gross domestic product revisions likely to show the world’s largest economy grew much more slowly in the second quarter than originally reported.

But more important than where the economy was then, figures pointing more directly at where things stand now — and what will likely transpire in coming months — hold the key to business sentiment.

On that front, neither reports on housing or weekly jobless claims are expected to provide too much comfort in the week ahead. Applications for unemployment benefits last week jumped back up to half a million last week, their highest in nine months.

“I don’t think we’ll get a double-dip recession but the rate of growth will be so slow that it will feel like a recession,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.

Forecasts for U.S. second quarter GDP growth have been revised down to 1.5 percent, the Commerce Department’s first estimate of 2.4 percent. “You need at least 2.0 percent GDP growth to get job growth and we’re going be below that,” said Polley.

Worries about weakening U.S. economic activity and dangerously low inflation will be highlighted this week by data on Japanese consumer prices that will show the country is still mired in a deflationary rut.

These and other omens of disinflation, the first hints of the dreaded threat of deflation, will dominate discussions at the Federal Reserve’s yearly policy pow-wow in Jackson Hole, Wyoming.

TENSE ENCOUNTER

Central bankers from around the world will gather at the picturesque mountain resort to discuss the looming macroeconomic challenges.

St. Louis Fed President James Bullard, who is worried the United States could go the way of Japan, said on Thursday that the U.S. central bank should be prepared to push borrowing costs even lower by purchasing more U.S. Treasury bonds if consumer prices appear set to fall.

Of course, concerns about falling prices in developed nations will have to coexist uncomfortably with fears of overheating in places like emerging Asia and Latin America.

Peru, for instance, reported last week its economy grew at a dizzying 11.9 percent clip in the year to June, prompting its central bank president, Julio Velarde, to express concern about investor euphoria toward the Andean nation.

If only the developed world had the luxury of such troubles. Instead, Europe continues to struggle with the prospect that measures at calming investor fears over high debt levels may ultimate impede growth.

Germany’s solid performance has taken some investors by surprise, and yet there are doubts about whether it can be sustained. The closely watched Ifo sentiment survey for August, due out Wednesday, is forecast to show a moderate decline to 105.7 from 106.2, according to a Reuters poll, with a measure of expectations also seen moving lower.

MARKETS ON EDGE

With the economic outlook, in Fed Chairman Ben Bernanke’s words, “unusually uncertain,” financial markets appeared to be hanging by a thread, with a renewed aversion to risk pushing U.S. stocks (Read more about the stock market today. ) back into the red for the year and driving Treasury bond yields to 17-month lows.

“The jobs issue will continue to hang over the stock market, as it hangs over the rest of the nation,” said Fred Dickson, chief market strategist at the Davidson Companies in Lake Oswego, Oregon.

The Fed’s decision last week to begin using proceeds from maturing mortgage bonds in its portfolio to buy more Treasuries, and speculation about the possibility of another burst of outright purchases, has driven the Japanese yen to 15-year highs, prompting fears that the country’s already meek recovery will sputter.

Much of the debate at Jackson Hole will center over what to do next. Many analysts fear the Fed may be running out of bullets, not because further asset purchases won’t lower rates, but because low rates may not be the ideal remedy for what some say is simply a fundamental lack of consumer demand.

Clouds over Jackson Hole