As Market Falls,Fed Banker Explains China Slowdown,US Prospects-plus how many rate hikes in 2016

A slowdown in Chinese manufacturing in December,coupled with fears of intensifying conflict between Iran and Saudi Arabia,left global markets in a tailspin Monday.The Caixin/Markit China Manufacturing PMI fell to 48.2 in December from November's 48.6,the 10th straight monthly decline.A reading below 50 indicates contraction of the sector.The Reuters consensus estimate for December was 49.0.In response to the China index and the exogenous event in the Middle East,the S&P 500 Index fell 31.28,or 1.53%.Opinions on Wall Street were split over how significant the slippage was for the 2016 outlook.*
For San Francisco Federal Reserve Bank President John Williams,who spoke to CNBC at the American Economic Association annual conference,it's important to realise China is undergoing a pivot to slower growth,and a pivot away from manufacturing to the consumer sector.I think this is an ongoing process that China is going through,Mr.Williams said.We realise we're in a global economy and we're affected by it.The Chinese stock market is not a major concern as far as systemic risk right now.What we need to do is,focus on maximum employment and price stability.We're focused on the attainment of our objectives.*
We're in very good shape.Unemployment is at 5% and GDP growth is a little over 2%.We're a little ahead of the pack in getting back to full employment and on a sustainable path.Where we're being hit hard is on our net exports,a significant part of our economy.Inflation is one thing we're still struggling to get up to our goal of 2%.We're on a pace to add continued job gains.That's very positive for the economy-a growth path of 2-2.5 GDP and unemployment edging back down to 5%.*
There are always unforeseen events:the dollar,oil prices.I have a medium-term outlook.I want to focus on what's happening over the next 2-5 years.I'm not concerned about the ups and downs of market moves.We have a capitalist system and that's what happens.We're on a growth course that would lead to 3-5 Fed rate hikes in 2016,Mr.Williams projected.

A Brandeis Perspective:Black Swan of a Jobs Report

The duration of unemployment today and the slowness of the labor market's recovery are unprecedented.This observation was reinforced by Friday's bleak Labor Department unemployment report,which revealed a jobs gain of only 39,000,and an increase in the unemployment rate from 9.6-9.8%.Lisa Lynch,Dean of The Heller School for Social Policy and Management at Brandeis University in Waltham,Massachusetts,described the report as a huge surprise.Even the most pessimistic economists were not coming in with so low a number.We should be adding 120,000 jobs just to keep pace with population growth.
Dean Lynch pointed out there was much lower growth in the manufacturing sector,in spite of the demand for autos.There was also contraction in the construction and retail sectors.We did see growth in health care and restaurants and bars.
Those who are working are putting in more hours.Seeing their friends and family members out of work,they are hesitant to shop.
At this rate,it will take the labor market about 12.5 years to recover,Bloomberg Television calculated.
Lisa Lynch received her BA from Wellesley College and a PhD from the London School of Economics and Political Science.She has been in her position since 2008,and is also a Professor of Economics at Brandeis.

When Employment Will Really Improve

Ethan Harris,chief North American economist at Bank of America/Merrill Lynch,thinks the best we can hope for is mid-2011.A pick-up in jobs is linked to clarity on tax and regulatory policy.He wouldn't expect agreement on those matters until the end of 2010 or January 2011.
The economy remains in a growth recession,and uncertainty is the enemy of growth.The Federal Reserve is using weaker and weaker tools,but it doesn't mean they're going to give up.
The market has been a bit overexcited about the election.If they just keep fighting with each other,that's not good for the economy.It's a bipartisan nastiness,Mr.Harris observed.
The economy added 151,000 jobs in October-the first increase since April,but the unemployment rate remains at 9.6%.At that rate of job creation,it will take seven years for the labor market to recover.
Bank of America/Merrill Lynch(BAC)

Canadian Economist Named Most Accurate

Sherry Cooper,an economist with BMO Financial Group,has been named the most accurate economist by Arizona State University's W.P. Carey School of Business.Dr.Cooper has also been recognized as one of Canada's most influential women.Educated by the University of Pittsburgh,she was selected as most accurate from a panel of 50 economists by Arizona State.
Dr.Cooper and her team were credited with pinpointing key indicators of both the beginning and end of the recent severe recession.
There's still a big unemployment overhang,Dr.Cooper observed.It wasn't caused by high interest rates as in previous recessions.Businesses laid off massively,so they're reluctant to hire back until the orders really start to come in.Employment contracted by 6%,which is totally unprecedented.
Until we start to see expansion in new businesses as well as old,it's hard to get everyone back to work.We could see unemployment at 9% by the end of 2011.The wave of inventory restocking is over,so the purchasing of equipment and machinery won't be as strong,either.
On the plus side,Dr.Cooper noted that consumption is growing a little bit more.The consumer is starting to come back.The effect of quantitative easing 2,the Federal Reserve's purchasing of more assets,will be pretty modest,but it is stimulative.
We're in a disappointingly slow recovery,but there won't be a double dip recession.
Bank of Montreal(BMO)

Recovery Without A Script

Mohamed El-Erian,co-CE0 and co-Chief Investment Officer at PIMCO,said that Friday's employment report was a half-full/half-empty report.It points to long term unemployment going up.There are structural aspects to unemployment.The question is whether you believe levels matter.You really need big changes.Mr.El-Erian doesn't believe there is a playbook to this.What with sovereign debt risk and regulatory shock,you need to reach escape velocity.The question is what you get in the second half of the year.
There is an inventory spillover,Mr.El-Erian pointed out,asking whether it is sustainable.Do balance sheets matter or not?The tug of war between cyclical and structural is very interesting.A tremendous amount of temporary and temporal stimulus is in the system right now.Do you face a hand-off to private demand or structural headwinds which the market isn't comfortable with?
Unfortunately,the crisis has been a balance sheet issue.There are few occasions of a balance sheet shock on top of a cyclical story,as we have now.PIMCO builds portfolios with four different layers:secular;structural;cyclical;and tactical.At this point,there are certain corporate bonds that PIMCO likes,Mohamed El-Erian noted.He was formerly manager of the Harvard Endowment.

Crunching the Market:PIMCO

Reacting to a mildly favorable jobs report,Bill Gross of PIMCO said the unemployment we've been seeing is a structural issue.It's gonna be very hard to replace those 8.5 million lost jobs.Many of them were in real estate,construction and mortgages-areas at the heart of the financial crisis.To posit a vibrant,positive economy based on the jobs report is off-base.
The economy,the asset markets have been reflated by the government,Mr.Gross explained.Now a lot of that has been halted,and some has been withdrawn.The private wallet and the will that must take over are being questioned by the markets.The minute that government check disappears,the private market is standing all alone.PIMCO thinks the transition to final demand is different this time than it was for other recessions.Instead of levering,we're delevering;instead of deflating,we're inflating.The new normal taking shape,a protracted period of slow growth and high unemployment,is a sea change,not a readjustment.

Economists Gauge the Prospects

A survey of economists conducted by the National Association for Business Economics shows that around 74% of them think the recession will end in Q3,while 19% think Q4 is more likely.A further 7% look for a Q1 2010 conclusion.The economists see the unemployment rate for 2009 averaging 9.1%,though some feel it could go as high as 10.7% in Q2 of 2010.This high unemployment will occur even if economic recovery begins,as companies will refrain from hiring until it is a certainty.The May unemployment report will be released on Friday,putting a question mark on the durability of the week's market activity.

The Unemployment Impact

Balance sheet effects dominate slope,Mohamed El-Erian observed.We have massive unemployment.It will take time to adjust.The real answer is,we don't know where the bottom is.Analytically,the employment report is no longer backward-looking.People will save more in the face of unemployment.It impacts forward-looking behavior such as home-buying,Mr.El-Erian pointed out.

When It Will End

I wish I could say there are compelling stocks,Dan Niles said,but there really isn't one.There's gonna be a lot of layoffs by the end of the year.Q1 of 2009 really scares me.That's the earliest I expect to see stocks bottom.Summer of 2009 is more likely.The layoffs will affect tech consumption.I expect 9-10% unemployment,Mr.Niles predicted.We are currently at 6.5%.These analysts' views are not optimistic for the medium term.Nonetheless,a number of advisers feel that long term investors should continue to dollar cost average into the stock market,taking advantage of the extremely low share prices-even if they may not be at absolute bottom.No one can call that.

Cold Water For Us

Noted analyst Meredith Whitney believes unemployment will reach double digits.Bank revenue will be down by up to seven percent.There will be a protracted period of negative operating leverage.We're going back to a 2001-2002 revenue environment.Estimates for the big banks are coming down.We're in for a rude awakening,resulting in a slow grind-down for these stocks,Ms.Whitney warned.