The surprise was not that GDP got revised down from initial 3.2% and first revised 3% to 2.7%, but that it was no longer consider "unexpected." While the punditry still talks of a "slowdown" and a "muddle-through economy" the broader expectations are coming to grips with the double dip. The main driver of the revision down was weaker than previously estimated PCE (personal consumption), dropping from 3.5% to 3% growth. Inventory was revised upwards a bit, and contributes over 2/3 to the GDP growth, but business spending was reduced from 3.1% to 2.2%. Since inventory rebalancing is expected to drop in Q2, this bodes very poorly for the next report. GDP growth has now dropped in half between Q4 (5.6%) and Q1 (2.7%).
In comparison, GDP grew between 7-9% for five consecutive quarters after the 1980 double dip recession. GDP grew in the double-digits for four years after the 1932 bottom.
ECRI dipped closer to the -10% level, which has signaled a recession 100% of the time for the past 42 years, dropping from -5.8% to -6.9%. Lakshman Achuthan, managing director of ECRI, now says a slowdown is inevitable, but found a way to add a dose of optimism:
After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its
growthrate to a 56-week low underscores the inevitability of the slowdown
ECRI is now back to the level of Dec 2007, when the recession started.
An interesting debate on CNBC this morning (around when the Brazil-Portugal game sputtered to a 0-0 tie) on Stimulus vs Austerity sputtered out as well but got across the point that this isn't really a policy choice; governments always try to spend their way out of problems until austerity is forced on them. Last night the US Senate abandoned efforts to continue extending benefits to unemployed and cash-strapped State governments. The most relevant impact to the double-dip is that this worsens crumbling State finances.
Politically, the US may be at the turning point and joining Germany, England and China in pulling back from continued stimulus (although Obama is likely to keep pushing for stimulus until the mid-term elections). It is doubtful the US calls for G20 to stimulate will have much credence. The Fed too seems to be frozen at a time when the money supply is gong the wrong way for a recovery.
Curiously, consumer confidence rose, and is at its highest since Jan 2008. As you can see from this chart, it remains at a low level. I am constantly amused by people who argue that "restoring confidence" is all that is necessary for a recovery. Confidence is at its highest at the peak (2000, 2007 and I daresay 1929) and at its lowest at bottoms) - the consumer remains a lagging indicator. It is also always argued that as confidence returns, money comes out of mattresses and gets spent; but other than a blip around tax refund time this year, we have been seeing lagging PCE. It may be when government transfers money that appears as a windfall, it gets spent, but hard-earned money tends to be saved or spent more prudently.
More relevant is that corporate profits continue to rise, and significantly profits beyond the banks that are TBTF. This of course supports the Hope Rally, assuming it continues (the report is of Q1 not current profits). Profits are a coincident indicator, and sometimes lagging, as rapid cuts in spending can temporarily boost profits amidst worsening economic conditions. Hence the good news on profits is not inconsistent with a future double-dip.
Instead, the indicators that suggest the double dip are all speaking loudly: housing, unemployment claims, consumer spending. They then get picked up in ECRI and other leading indicators, all of which are dipping. You can pick out green shoots here and there, such as durable orders falling less than expected, but even there we are seeing a dip in the growth of tech and consumer electronics (iPhones and iPads notwithstanding).
A final discussion out there is whether the yield curve is signaling recession. Mish has been showing this chart as the warning sign. It clearly shows there are no inflationary expectations in the US economy. Instead, it shows what happens when an attempted reflation fails.
Gary North analyzes this, explaining why an inverted yield curve normally signals recession: higher rates out the curve are required to hedge against inflation, but as short term rates are raised to curtail inflation, the curve inverts and a recession follows. In this case, the Fed is holding down short term rates and the fear is of deflation. The obvious failure of central banks to reflate means that in the private market short term rates will rise, leading perversely to a liquidity shortage. Lenders compound this by buying bonds to lock in the longer term rates, driving rates down. Hence, this time around the inverted yield curve is produced by fear:
- business borrowers fear of inadequate capital, so they pay up in the short end
- lenders fear a recession with falling rates, so they lock in the long end
As a consequence, the CMI indicator which tracks the demand side of the economy, is dropping and signaling contraction. Their explanation of the impact of continued government interventions and gimmicks is priceless:
[I]t has instead, unfolded so far as a mild but persistent kind of contraction, more like a 'walking pneumonia' that keeps things miserable for an extended period of time.