A Double Dip Recession?

Kirk's Note:  Don't forget that two successive quarters of negative GDP growth (contraction) is typically called a recession.  We could have -1% GDP in Q3 and +1% in Q4 to average no growth and thus avoid a "semiofficial recession" and still meet ECRI's current belief that there will be no recession in 2010 for a "double dip."  Spending to clean up the Gulf could surprise people and add to GDP just as repairs after a hurricane increase GDP.   I'm up about 4% YTD while the markets are roughly flat.  Much of this is from good stock selection with the rest from trading the volatility.  I sold stock today and Tuesday for my explore portfolio after buying shares near the very lows less than a month ago.
--Kirk out

-------- Original Message --------

Subject:	FW: A Double Dip Recession?
Date:	Fri, 18 Jun 2010 11:15:56 -0700
From:	Jas Jain

FW: A Double Dip Recession?

 

http://macromarketmusings.blogspot.com/2010/06/double-dip-recession.html

 

Thursday, June 17, 2010

A Double Dip Recession?

The topic du jour in many parts of the economics blogosphere is whether there will be a double-dip recession in the second half of 2010. Some folks like MacroAdvisors see absolutely no chance of a recession while others like David Rosenberg see a 80% probability of another recession. Other observers like Yves Smith, meanwhile, question whether there has even been a real recovery at all. One bit of information that is stoking the coals of this debate is the ECRI's weekly leading economic indicator series. Supposedly this is one of the better leading indicator series and as a result some folks have taken notice of the recent 5-week decline in the series as evidence there is a real chance of a double-dip recession. This series is graphed below (click on figure to enlarge):


I thought it would be interesting to use this series to help forecast real GDP over the second half of this year. To make this forecast I first converted the weekly series into a monthly one and plugged it into a vector autoregression (VAR) model that also had the monthly real GDP series from MacroAdvisors (yes, the same ones who see no recession later this year). Using 6 lags of data, I estimated this simple two-variable VAR and forecasted monthly real GDP for the months of May, 2010 through December, 2010. The forecast starts in May since the current real GDP data only goes through the month of April.

So what does this precipitous decline in the ECRI leading indicator mean for real GDP going forward? Here is how the VAR answers the question:

Real GDP will slow down to about 0% growth according to this simple model. This forecast is consistent with many observers--including ECRI as seen this video--who see a growth slowdown the second half, but not an outright contraction of the economy. I would note, though, that this type of analysis should only serve as a baseline forecast. Other developments such as a worsening of the Eurozone crisis or premature tightening of economic policy could further undermine U.S. economic growth.

DEFLATION DYNAMICS by David Rosenberg

-------- Original Message --------

Subject:	FWC: DEFLATION DYNAMICS by David Rosenberg
Date:	Fri, 18 Jun 2010 09:09:03 -0700
From:	Jas Jain

David Rosenberg; 06/18/10:

"DEFLATION DYNAMICS: It truly amazes us how so few people in the business get it. Everyone has inflation on the brain because everyone has spent his or her entire professional lives living with it. Or maybe because the double digit inflation rates of the 1970s and the 1980s are seared in everyone's memory. Go back and read the Homer and Sylla classic on the History of Interest Rates. Outside of wars, deflation is the norm, not the exception. The exception has been the experience of the post-WWII era."

 

My own conclusion about the inflationary wave of 1970s in the US is that it was a once-in-centuries event caused by people living longer, increase in independent households due to increased divorce rates as well as unwed single mothers, and global demand due to tremendous economic growth in Germany, Japan, etc. Under these conditions it takes time to catch up with demand. Deflation is the normal outcome in a capitalistic economy driven by technology. The increase in the govt debt is deflationary in the future! Please don't buy into "Printing Money" idiocy in connection with countries like Germany, the UK and the US. People don't yet get the deflationary wave that lies ahead for the aging Western economies.

 

"The U.S. inflation rate peaked in 1980 at nearly 15%. By the summer of 2007, it was down to 3%. It had gone from 15% to 3% even though the baby boomer balance sheet exploded. The aggregate nonfinancial debt-to-GDP ratio surged from 135% to 220% over this timeframe, and yet the inflation rate collapsed by 12 percentage points. The reason was due to classic supply-related shocks — globalization, capital deepening, massive gains in technology, productivity, freer trade, lower marginal tax rates, which spurred the trend towards secular disinflation.

"However, in mid-2007, the secular credit contraction came to a thundering halt. Deleveraging is the new secular trend, and since we entered the other side of the credit mountain, the inflation rate is down to 2% and the core rate of inflation is 90 basis points south of zero. Imagine that when the oil price was at $10 a barrel back in 1998, the core inflation rate was 2.5% and today, at $75 a barrel, the rate is below 1%. Now that is a deflationary stylized fact, if there was one.

"The situation now is one of debt destruction, not debt expansion, and it is only a matter of time before we see prices in the aggregate start to deflate. We are not talking about 10% or 20% price declines — more like 2% to 3%. Enough to jeopardize the lofty earnings estimates embedded in equity market valuation, enough to thwart the progress needed to resolve our intractable deficit and debt problem and enough to take bond yields back down to their 2008 microscopic lows."

Jas

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