by Calculated Risk on 10/10/2011 08:33:00 PM

From Professor Duy: Too Early to Sound the All Clear?. An excerpt:

[A]lthough there is optimism the European situation can be resolved in three weeks, they seem to be walking a very fine line between attempting to recapitalize the banking system without undermining sovereign debt ratings while maintaining what effectively amounts to a pegged exchange rate system that is fundamentally inconsistent with the economic needs of more than one nation. In addition, they have an odd situation where every nation needs to issue Euro-denominated debt, but no nation can actually print Euros as a backstop. It's as if each nation issues only foreign-denominated debt, with ultimately no lender of last resort on a national level. Of course, the European Central Bank could fill this role, but will they?

My experience is that when a financial landscape is as ugly as we see here, there is no rescue plan. Things tend to get much worse before they get better. That seems to be what financial market are telling us.

Duy mentions the optimistic Bloomberg article today: No U.S. Recession as Forecasts Improve

A string of stronger-than-projected statistics -- capped by the news on Oct. 7 of a 103,000 rise in payrolls last month -- has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their growth forecasts for third quarter growth to 2.5 percent from about 2 percent. That’s nearly double the second quarter’s 1.3 percent rate and would be the fastest growth in a year.

Goldman did up their Q3 growth forecast, but they remain cautious on the next few quarters. In a note research note titled "Economy Holds Up, But for How Long?", they argued "real income growth has stalled" and "financial conditions have tightened sharply in recent months". They think growth will slow over the next two quarters.

I still think the a new U.S. recession is unlikely, but there are definite headwinds and downside risks.