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.

Double dip recession and the perverse math of GDP reporting

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.

  1. Bobzillah Killah says

    Nixon’s stimulus in the early seventies, the Fed’s actions all through the nineties, the deficits, low interest rates, bubble creation, liquidity creation of George W. Bush, the stimulus of George W. Bush and Obama; all different versions of the same thing, trying to kick the can down the road to avoid the prospect of the dying off of enough debt financed overcapacity to cause a massive downturn. It never works because stimulus doesn’t create real demand that will keep debt financed overcapacity going. They keep telling us they believe in a market system and then continue to act as if they think they can find a way around financial reality and avoid the consequences of the way markets work. For the religious or the secular, Jesus said it best, “I can make the blind see, the lame walk and the deaf hear; but I cannot turn the fool from his folly.”

  2. Gloomy says

    Gary Shilling made the following analysis in his latest newsletter, which I think says a lot about where we are headed. He attempts to quantify the effects of the inventory build. (incidently, he has not yet predicted a double dip, although he is shorting the market).

    Inventory-Driven Recovery
    We constructed a statistical regression
    model to explain industrial production.
    The objective is to determine how
    much of its rebound in the second half
    of 2009 and first quarter of 2010 was
    due to the lessening of inventory
    liquidation as opposed to the other
    factors we included as explanatory
    variables—the quarter-over-quarter
    changes in real consumer spending,
    housing starts, real equipment and
    software spending and real
    nonresidential construction. Over the
    second quarter 1959 through the first
    quarter 2010 sample period, the model
    had an excellent fit with an R 2 of 0.65,
    and all the independent variables are
    statistically significant.
    As shown in Chart 19, in the second
    half of 2009 and first quarter of 2010,
    the unwinding of inventory liquidation
    accounted for 69% of the rise in
    industrial production. The economic
    revival through the end of 2009, then,
    was almost entirely due to the reversal
    in the inventory cycle directly and as
    the effects worked their way through
    the production system. The modest
    pickup in consumer spending
    [email protected] http://www.agaryshilling.com
    accounted for only 20% of the gains,
    and as we’ll discuss later, was only
    positive because of massive fiscal
    stimuli. The revival in equipment and
    software spending essentially was offset
    by weakness in nonresidential
    construction. Housing activity
    contributed almost nothing.
    This analysis implies that much of the
    recent rise in domestic manufacturing
    (Chart 20) and imports (Chart 21)
    resulted from the effects of the
    inventory cycle working their way
    through the supply chain, not from a
    self-generating and self-sustaining
    pickup. Furthermore, anecdotal
    evidence suggests that the strength in
    capital equipment spending is found in
    high tech and other areas that contribute
    to productivity enhancement and costcutting,
    not to those that add to capacity,
    which remains more than ample (Chart
    22). The effects of excess capacity are
    clearly seen in the ongoing weakness in
    industrial, commercial and other
    nonresidential structures (Chart 19).

    1. Edward Harrison says

      Good info. You should note that I flagged inventories as a major reason we would get a recovery in 2009 and why I saw it flagging in 2010. That said, there is still the possibility of inventories adding to growth if we see more hiring and income gains.

      Like Shilling I think we’ll see the effects of weak spending on earnings and that will make it hard for inventory gains to GDP to continue apace.

      1. Gloomy says

        For sure you are on the same page with him. Here is one more quote from Shilling, much in line with your perspective:

        Four Cylinders
        A consumer saving spree, increased
        government regulation and a number
        of other forces (Chart 7) set the stage
        for slower economic growth in the
        next decade, including the remainder
        of this year and next. Furthermore, as
        discussed in our May 2010 Insight, in
        the typical post-World War II
        economic recovery, four cylinders fire
        to push the economic vehicle out of
        the recessionary mud and back out on
        to the highway of economic growth.
        At present, only one—the ending of
        inventory liquidation—is generating
        significant power. The other three—
        employment gains, consumer
        spending and a revival in residential
        construction—are sputtering at best.

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