If the data are so good, why is everyone screaming double-dip?
This week’s review post is a bit late since I have been spending all my time watching the World Cup. Like last week, I will put the review in narrative form with links to last week’s posts embedded.
The numbers were OK but…
I think the last week’s data were pretty good. I know I’m putting a bullish gloss on things here but the jobs number was up at the end of the previous week, jobless claims were better, consumer confidence is up, freight and truck traffic is up, and we saw some modest consumer deleveraging. Moreover, despite the shockingly weak retail number, if you strip out the non-core measures, the number wasn’t terrible (it wasn’t good either). So, on the whole, the data were ok. Moreover, the market seemed to like the data as shares rallied from an oversold position last week.
The problem comes when you dig beneath the surface to more forward-looking data.
ECRI data. The ECRI numbers have been misinterpreted by analysts. There is nothing in the numbers which indicates imminent double-dip recession. They are not that dire. ECRI Leading Indicators levels are now flashing red because this tool suggests slowing growth. That’s all. I have said I expect 1-2% in the 2nd half of the year. And the ECRI numbers are in line with that. Let me explain where the slowing growth is likely to come from and what that could lead to.
Stimulus. As I have been saying for some time now, stimulus is wearing off. Remember this December article?
it’s irrelevant what percentage of the stimulus spending has already been spent. That is not how GDP is measured. It’s the quarter-on-quarter change in GDP that is relevant – and government stimulus subtracts from the change in GDP starting in Q3 2010 (see column two above).
This is why President Obama’s explanation for his recent turn toward deficit hawk is misguided. He said he wants to avoid a double dip recession, but clearly this is baked into the cake unless he increases spending and/or lowers taxes. What’s more is fiscal year 2011 for states and municipalities will go into effect at just that point – and with a huge deficit looming, that translates into another massive reduction in spending or a huge increase in taxes or both.
If the recent spectacle of government handouts to big Pharma and the banks via GSE mortgage market intervention give you that warm and fuzzy feeling about the efficacy of stimulus, then you’ll want to see some serious additional stimulus to prevent this coming train wreck.
This is very much what is happening right now. Back then, the Obama Administration was in deficit hawk mode. Remember "Barack Obama: “if we keep on adding to the debt… that could actually lead to a double-dip”?" I do. Now they have done a 180 and are talking about stimulus at the federal level and transfers to the state and local level too. My sense is they are now on to what people like Krugman were talking about in December. But, it’s too late the austerity party is already happening because the bailouts have discredited any benefits the Obama stimulus had the first go round. I make this point in quoting John Hussman on Bailouts of Poor Stewards of Capital.
State and local government. I highlighted one of the more extreme state and local government messes with Ghost Town Detroit this week, but the problems in Detroit are a more severe version of what many other states face. The final cuts are coming as Fiscal 2011 looms. Read my January post Chart of the Day: State Budget Gaps 2010 for the macro picture. My February post Fiscal emergency in New Jersey harbinger of state cuts gives a specific example.
Jobs. And, since these state and local government issues are related to jobs, that’s where we want to see some oomph. John Lounsbury says More than Half a Million Job Losses Are Coming because the census workers will be back on the jobs market in short order. The private sector is not hiring enough yet as I indicated in Is Government Crowding Out Private Sector Jobs?. Suffice it to say, we will need to see the private sector doing a lot more hiring to absorb these workers.
Mortgages. John Lounsbury wrote the post Mortgage Applications Plummet which does make one wonder whether housing will double dip. At a minimum, mortgage rates are low. So that is supportive of the market. However, this bears watching as asset markets do have a psychological impact. Comstock and Annaly Capital Management’s views of the housing market are very detailed. See their posts, Comstock: The Dire Outlook For Housing and The Financial Crisis Is Not Over for a good roundhouse view of why housing could double dip. Also catch Why It’s Not A Normal Recovery which was Comstock Partners’ weekly last week. It’s a good read as well, but more about the overall economy.
Stock Market. The problem for shares is that while 1-2% growth may be coming, shares are priced for much higher economic activity. US markets recently broke down below the 200-Day moving average. We are still below that 200-day moving average and that’s a sell signal. To the degree you think the markets are forward-looking, this tells you something. My view is that the extremely high profit margins companies have now will revert to mean as the slower growth takes hold and this will bring markets down from present levels unless more stimulus is applied. Fred Sheehan addresses this in his post Should Investors Boycott the Stock Market?
Europe. The Europeans are in full austerity mode. I am not talking just about the periphery in Greece, Spain, Portugal or Ireland, but core Europe. France is looking for 120 billion euros of cuts and Germany for 100 billion. That gives you a sense of how much demand will be sucked out of the European economies. And contrary to popular belief, austerity doesn’t give the markets confidence in sovereign debtors. The opposite seems to be happening with Contagion Spreading Yet Further To Core Euro Zone. When I wrote A few thoughts about the euro crisis and the psychology of change, I said that the Europeans simply don’t understand this. Eventually, another crisis is coming to Europe for sovereign debt or bank capital. This is not supportive of the euro.
So Obama can forget about exporting the U.S. to prosperity, just ask the Swiss who are intervening in currency markets. Moreover, the relatively weak euro makes it more likely the Germans would be the first to export themselves to prosperity. Clearly, this sets up trade tensions and the protectionist crowd like Charles Schumer and Paul Krugman are all over this one.
The double dip scenario
So, while I think the coincident indicators are fairly good, the leading indicators and the political economy are weak. That’s what had me Re-considering the Great Depression II Meme which would naturally follow from a double dip. Nassim Taleb spoke to this issue in two video clips in one of the better-read posts this week. His thesis is that the US debt problems are worse now than in 2008 because of the public sector debt and the sovereign debt crisis. My view is different as I focus on the private sector debts in an environment of fiscal austerity. That, to me is the debt deflationary scenario that makes austerity and slowing growth toxic. For an analogy of how austerity works, read The cardio diet to deficit reduction – a modern fable. The MMT’ers Rob Parenteau and Marshall Auerback come to the same conclusions from a different angle in their post The G-20 Votes for Global Depression.
That’s it on the economy. I did two tech posts this week on The Future of Computing and The Coming Apple – Android Wars which I followed up with The Coming Apple iOS – Android Wars. The gist of the posts was that Apple is losing momentum in the mobile space and this will have a negative effect on top line revenue growth and market share. Eventually I expect margin erosion because they will be forced to counteract the Android menace.
BP oil spill
John Lounsbury provided the only two Deepwater Horizon updates this week with BP: The Mother of all Egregious Violators and Deep Horizon Spill Size Estimates Keep Growing, As Do Costs. I suspect this is going to be a bigger week in BP news, so we may have more on this issue in the coming week.
Update: I should also mention the BRICs and taxes here. It isn’t clear whether taxes will increase, so its effect on the economy won’t be known until later in the year. But, the emerging markets of Brazil, India, and China especially will have a positive impact on global growth. These economies are over-heating if anything. As we head into the second half of the year, growth in China may slow but it still will boost global demand.
I should also point out organ Stanley’s more Bullish view on the double dip meme "Morgan Stanley – Just Say No to the Double-Dip." This makes the counterfactual arguments I was looking for as to why we won’t double dip. Definitely read it.