A double-dip recession is unusual. We may have had only one - in 1980 and 82. We had a double dip depression in the '30s, but the dips were five years apart, and the whole period is more of one slow slog of government life-support and a moribund private sector than a happy recovery and a fall back. It shows up in this unemployment chart - we never got employment back to pre-Depression levels until after the war. The question right now is will we have a double-dip in the Great Recession?
The buzz to start this week was of the second coming of the double-dip, set off by David Rosenberg. What spooked him was the ECRI index falling below zero (see next chart, courtesy Pragmatic Capitalist). When ECRI drops below -10 (from its current -3.5), it has signaled a recession 100% of the time. Rosenberg ranks the odds at 80% of the double-dip. ECRI's indomitable leader continued his optimistic take, saying that while the drop "assures a significant slowing in US economic growth in the coming month, the recent weakness has not lasted long enough to signal a new recession threat." Others have backed his stance, saying it is premature to call the double dip or this is not a recession signal but a reaction to the sharp rise off the bottom. Fair enough, but the countdown has begun.
For the stats minded, here is a look at its record of prediction. The recent decline is the largest before any prior recession. Also, ECRI tends to be late in predicting a recession. Other leading indicators are also rolling over, such as the Conference Board LEI, which at least shows a slowdown:
Morgan Stanley holds out for just a slowdown, arguing primarily that global growth is rebounding. Indeed, there is some glass-half-full optimism even over in Europe, where the UK just raised GDP estimates for next quarter - ironically due to the Euro crisis and a cheaper Pound - but lowered their 2011 estimates. The same goes for Germany and a cheaper Euro, where the expectation is it helps more than austerity in Club Med hurts. Still, the OECD indicators for the global recovery are all rolling over to slower growth. Peaks are evident in the US, Japan and Germany, and are now showing up on the UK, France and Italy. Worse, China too is rolling over:
The poor retail report Friday also casts doubt on the recovery. It was the biggest decline since last September, and if we remove Cash4Clunkers, the biggest since March 2009, over a year ago. It may be that it reflects distortions from the first-time homebuyers credit, which caused a surge in April and thus may have led to the largest sector drop, a drop of 9.3% in May of building materials; but other sectors were down as well, including general merchandise and clothing. Auto sales are also looking weak, as fleet sales are up much more (32%) than individual sales (13%) in the first part of 2010, leading George Pipas, an analyst of Ford, to opine that consumers are back to deferring big purchases due to economic uncertainty. Savings had dipped a bit, but savings has gone back up, suggesting that a flood of tax refunds and other government checks may have temporarily boosted retail around April 15. That is now over.
If we look at other GDP factors, two elements which had boosted GDP are now lagging: the inventory surge is now over, and State spending from stimulus is also on the downswing. State sales taxes are also likely to shrink, as we see in Texas, putting further pressure on State spending. The impact on GDP may be a 1/4 point, and comes on top of a drag of 1/2 point from the lower Stimulus and a further drag from the loss of the 1.3% inventory adjustment on Q1, making Q2 in the range of 2% lower than Q1.
John Hussman gives us five leading indicators of a coming recession:
- Widening credit spreads (check!)
- Flat yield curve (almost there!)
- Falling stocks (check!)
- Moderating ISM growth (check!)
- Moderating employment growth (check!)
The countdown to the double-dip is on.