Our story so far: Economists as a group, completely missed the oncoming credit crisis, recession, and market collapse. In the beginning of 2009, they did not discern the economic revival. They sure as hell missed the March 2009 market bottom and forthcoming 78% rally.
Now, with Q2 of 2010 coming to a close, many have begun chattering about a double dip recession. A Google search for double dip recession generates 3,470 recent news items.
While I suggest you ignore those forecasters who — repeatedly — got it wrong, let’s at least look at the data to see what has the dismal crowd all hot and bothered.
Over the past year, a combination of pent up demand and Federal largesse created an initial spike in various sectors: Retail sales, housing activity, autos, and of course technology. However, the initial pop is now fading.
As the data confirms, there can be no doubt we have entered a soft patch. Indeed, the following data points confirm a general slowing:
"¢ Jobs: Private sector hiring cooled off last month, with just 41,000 hires;
"¢ GDP grew at a 3% in Q1 2010, down from 5.6% Q4 2009.
"¢ Europe: The problems in Greek Spain and Hungary are likely to lead to significant austerity measures in Europe. Expect the Continent to see anemic growth at about 1% GDP, and that can shave 0.5% off of US GDP.
"¢ Retailers showed a disappointing May, making no gains (outside of Autos).
"¢ Homebuilders sentiment and mortgage apps have plunged, following the expiration of the home buyer tax credit.
"¢ China appears to be guiding its credit and real estate sectors to slower growth.
"¢ Conference Board Leading Economic Index (LEI) fell in April by 0.1% — the first downturn since March 2009; (May data wont be out for another 2 weeks, but it also appears to have softened).
"¢ Dr. Copper looks pretty sorry, as commodity prices plunge worldwide.
"¢ Unemployment claims were declining, but that progress seems to have stalled
This is, historically speaking, normal. ECRI’s Lakshman Achuthan told Newsweek: “You always have a spurt in growth out of recession and then you throttle back. But we'd need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk."
That “pronounced, pervasive, and persistent decline” is simply not present. Indeed, double dip recessions are actually rather rare. As Yale Professor Robert Shiller pointed out in a recent Sunday NYT article, “When inflation-adjusted G.D.P. has come out of a decline and posted three or four quarters of gains, it has never immediately begun to fall again — at least not since quarterly numbers began to be issued in 1947.”
And that is what we have had — a year of improving GDP. Following the initial surge in data off of the lows, we have entered a slowing phase of the recovery.
The key factor regarding all of this slowing data is that it is suggestive of an economy that will continue to expand, albeit at a slower pace. None of this data is highly aberrational, and none of it is consistent with past double dip recessions.
Indeed, even Capex and employment plans for the upcoming year show a potential upswing. ISI reports that their mid-year survey of CFOs shows the percentage of companies planning to boost their capex & hiring in 2010 has increased markedly. This would be heading in the opposite direction if we were on the verge of a double dip recession.
So then why all this sturm und drung? Newsweek’s Dan Gross sums up the cause of the residual bearishness of the dismal set:
“The concern about a double dip is largely a function of what I'd call residual bearishness. Stung by excessive optimism in 2007, the econo-pundit community remains in a reflexive, dour crouch. Since it began in the spring of 2009, this recovery has been widely disbelieved and dismissed. Fretting about the double dip is as much about where we've been as where we are.”
Ironically, it is the new breed of Deficit Hawks are the ones pushing for a double dip recession. After decades of profligacy, they now seem to want fiscal austerity in the United States — just when the economy is most vulnerable. They apparently have failed to learn the lessons of 1929-33 and 1937-38. The time for balanced budgets and fiscal prudence is during the expansion phases of the economy — and not the post recession period where after an initial spurt, growth is beginning to slow.
Well it is good to know we can always find a different insight that will show us a different approach of the same metrics meassuring the same market aspects. In my opinion, while this can be a relief it also makes me think that an individual has to have a lot of knowledge when it comes to understanding the metrics and getting to know which sources are the ones to be trusted. But, what happens with the average audience? who to trust?
I gave up economics long ago. It can tell you where you have been, but is famously useless at predicting where you will go.
Personally, I look at the fundamentals. Where are the companies on the stock ticker going to get those earnings? What jobs are left for those consumers who are supposed to buy buy buy? Why is housing STILL out of line with the average income of the people who are supposed to buy it? What exactly is the entire Gulf Coast going to do for income for the next 15 years? What will it cost to fill up the car by next summer? If you don’t want to buy things made in China, what are your alternatives? Why has there been not one single indictment for all the fraud, front-running, and commodities manipulation I feel like I’ve been seeing for the past five years?
The crisis and its causes were papered over, and nothing was fixed – at great cost. None of the benefit of those expenditures has flowed to the people, aside from some government hand outs here and there in the nature of extended unemployment benefits and food stamps. Oh – right. If we bought a car, or a house, we could also get some skin. I have no idea why the economists are suddenly unhappy, but I can tell you why the people are bearish. And churlish.
“The time for balanced budgets and fiscal prudence is during the expansion phases of the economy "” and not the post recession period where after an initial spurt, growth is beginning to slow.”
The problem seems to be that there is just too much supply side still left in the system.
And as in previous great dips, I’m guessing the degree of politicization was not the same over fiscal austerity.
For me, it’s all about jobs and my look at history, albeit biased, tells me there’s a world of hurt to come.
Hope I’m wrong.
Then there’s the bunch that conflated the stock market with the economy. This is especially common among those who proclaim economics is crap .. we don’t respect it and we don’t understand it, but we like to sound like experts anyway.
The market goes down for a few days and, according to a growing number of experts, both economists and talking heads, it is potentially on the way to S&P850. This is a market level that is consistent with optimistic trailing average P/E levels. It could go much lower and still be consistent with trailing P/E levels, historically.
Sales pundits like to discuss market levels levels consistent with projected futuristic, imaginary P/E levels because this hypes sales and people are gullible enough to swallow the carnival atmosphere fraud. Remember, financial advisers get paid only when people stay invested.
Many are rightfully worried about if the current stock market is just another in a string of asset bubbles. Many also concerned that the recent economic growth is only function of explosive deficit spending and only empty calories.Talk of double dips is healthy because it promotes understanding of real economic performance. It also helps sort out the distinction between the asset bubble stock market and the real economy.
[...] Get up to speed on the double dip debate. (TBP) [...]
Meanwhile, an analyst on CNBC’s website is recommending investing in ‘barbed wire and guns,’ further blurring the line between financial media and Soldier of Fortune magazine.
http://www.cnbc.com/id/37549417
I have an idea: Why don’t you take the same money you would have spent on ‘barbed wire and guns’ and stock the basement and the garage with enough bulk foodstuffs to feed the neighborhood for six months if you think it’s going to be like that…
I posit the argument that it is neither a soft patch or a double dip; we are still in recession and have been for the past year, the government/FED simply spent $3-4T to paper over that fact. Absent another “recovery package” the true state of the economy will start showing itself once again.
I know it sounds like I am beating a dead horse but it seems to me that “the economists” and Barry are playing around with numbers and semantics while ignoring the $3-4T elephant in the middle of the room.
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BR: Psychologically, that seems to be true — but governments all over the world ALWAYS do that following a crisis.
Read Reinhhart and Rogoff for the historical perspective.
Julia Chestnut asked: Why is housing STILL out of line with the average income of the people who are supposed to buy it?
That’s my question, too, in addition to jobs. With credit standards tightening, foreclosures and “shadow inventory,” RRE prices can only go in one direction. There are no indications that wages and job growth will support current prices. Once RRE unwinds to a sane level, my main quarrel with this economy will be resolved.
This assumes that what Dead Hobo alludes to above isn’t the case and equities aren’t just a bubble.
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BR: See this chart Home Sales Collapse w/o Government Support
This is not your average recession to paraphrase Yogi Bear. The stimbucks spent thus far haven’t made much impact on the “real economy” (the big banks and their perfect trading in 1Q aside).The mood isn’t right for more deficit spending although I’m sure we’ll get a Gulf Stimulus plan with different wording (got to get FL into the right col for the next pres election)
Dead Hobo: It is a bubble. What do you think will happen once the Fed raises rates back to a more normal level? Heck, how long has Japan had rates at the ZIRP level? And they are still suffering deflation.
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