US in full-blown recession, It’s already too late today to stop it, and it’s now only a question of degree.

Foreign Exchange Currency Outlook : Attention is going to turn back to economic data once the debate and the passage of the Paulson plan are behind us. And it’s not a happy sight. The landscape is strewn with the dead bodies of once-robust statistics. Before mentioning specifics, let’s be sure to accept the idea that every financial crisis results in contraction of economic activity. The bigger the crisis, especially burst-bubble crises, the bigger the contraction.

This time we are talking about the restructuring of the US banking system, in quantity if not in quality. Most economists argue that a new model is needed, once that explicitly addresses policies and practices pertaining to risk. We probably won’t get it this time (unless government changes its stripes) and so the US economic contraction may lurch forward to minor recovery to another crisis within a few years. Since so many people think this way, it could become a self-fulfilling prophecy. It’s not at all clear that either presidential candidate, let alone Congress, has the chops to overcome the huge lobbying efforts of the financial sector and institute real regulatory change. They say government has failed in this regard, but what will they do? By late January, when the new government takes office, we will almost certainly be in a full-blown recession.

It’s already too late today to stop it, and it’s now only a question of degree.

On the road to acknowledging contraction/recession, we have evidence in the form of today’s factor orders, estimated down 3% in Sept, the most since August 2007, after a rise of 1.3% in July. Bloomberg reports that the forecast range is a drop of 6 percent to rise of 0.5%, meaning that the only favorable outcome is still a measly one. We also get durables, which are about half of total factory orders, probably a drop by 4.5% in Aug after an okay gain of 0.8% in July. But remember that transportation is a big chunk of durables. Ex-transportation, orders probably fell 3% after squeaking by with a 0.1% gain in July.

Friday we get the biggie, nonfarm payrolls. ADP Macro says the private sector component will be a loss of only 8,000 jobs in September, while the rest of the market thinks it’s more like 50,000. ADP mentions that the report may be skewed by two special factors, the Boeing strike and the two hurricanes.

Well, yes—it’s always something.

Despite the really bad news about to hit the fan, the US is still one step ahead of the Europeans, who are meeting Saturday but probably not to agree on a region-wide rescue plan. And the FIFO argument still holds, too, that whatever contraction we get, the US will come out of it first. We find these weak arguments for a strong US dollar exchange rate, but failure to disclose problems in the European banking sector weighs heavily, and Ireland’s action yesterday was very frightening in places like Spain. We expect the dollar exchange rate to stop making gains right around where it is now, at the historic low, until something new comes along to propel it further.

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Barbara Rockefeller - Forex Trading Reports

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