High unemployment and sluggish growth is causing the US economy to lose any momentum it had in terms of a recovery, Pimco‘s Mohamed El-Erian told CNBC on Thursday. El-Erian also pointed to Friday’s upcoming GDP numbers which he says will point to the negative trend.
“We are going to get confirmation with revised GDP numbers that are down and for the last quarter and downward revision for the third and fourth quarter.”
“Today’s jobless claims numbers are better than last week’s. But it’s not a good overall. What this tells us is that the employment picture is difficult in creating and holding jobs. And the bigger picture is that the economy is losing momentum when it comes to growth.” Mohamed El-Erian, CEO of the world’s largest bond fund, says.
El-Erian also points to Friday’s upcoming GDP numbers which he says will point to the negative trend.
“We are going to get confirmation with revised GDP numbers that are down and for the last quarter and downward revision for the third and fourth quarter,” El-Erian says.
“This will also show slow growth.”
Negative Economic Trends
El-Erian goes on saying that the negative economic trends are forcing a new way to think about what makes up a recovery.
“If you think in traditional terms, then there will be a back and forth” (on economic numbers), he says.
“But if you think in terms of an economy that has to have escape velocity, so you have to achieve a critical mass in terms of growth and employment creation, the numbers are going to tell us that we are in this new normal of muted growth and high unemployment and we’re going to have to navigate through it.”
As for the bond market and a possible “bond bubble”, El-Erian saya that the rush into buying bonds is due to the fact that many investors are underexposed in the fixed income market– and that people are more risk adversed.
“If you look at what the (bond) market is telling you, it’s saying that the outlook is for low growth and disinflation. “The bond market may be cheap in terms of a slow recovery scenario, “ the Pimco-boss adds:
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Deflation Risk; 25% or higher
El-Erian also agreed with Nouriel Roubini of Roubini Global Economics who told CNBC on Thursday, that the US economy has a high risk of going in to a double dip.
“I think Nouriel is correct when he says the ‘US has no spare tire’ to fix the economy if something happens,” El-Erian says.
“I put the risk of deflation at 25 percent and the latest figures show it may be even higher.”
And in regard to policies of the Federal Reserve, whose members are meeting for their annual symposium on Jackson Hole, Wyoming, El-Erian says that he’d like to hear them talk about the so-called liquidity trap, or the idea of using monetary policy to get companies and banks to take more risks with their money when they don’t want to.
“I’d like to know if they (the FED) have any idea of how close we are to a liquidity trap. I think we are close to one, and if so, we would have to look beyond the Fed to help move the economy. They (the FED) won’t be to force people to use their money and we’ll have to look elsewhere to solve our problems.”
- El-Erian: Fed can’t do much more to boost economy (investmentpostcards.com)
- PIMCO’s El-Erian: The US Is On The Road To Deflation (businessinsider.com)
- El-Erian Sees Bumpy Road for Investors to New Normal: Tom Keene (businessweek.com)
- El-Erian: What to expect from Bernanke’s report to congress (ftalphaville.ft.com)