Leading Indicators Support the Slow Growth Scenario

The trend is your friend until it meets the bend - Albert Edwards, SocGen

More indicators are coming in besides GDP that we are not in a V-Shaped Recovery. It appears that the economy is in an "L-Shaped" slow growth mode (2% annual growth outside of gimmicks and stimulus) with heightened risk of a W-Shaped double dip.

PragCap reports: "ECRI confirmed what yesterday’s GDP report is telling us – the economy remains in recovery, however, is beginning to slow." The ECRI index continued to grow, reaching the highest level in two years, but the rate of growth slowed to a 38-week low (see chart). Laksham Achuthan, managing director of ECRI, concludes: "overall U.S. economic growth will soon begin to ease, in line with the downshift in GDP growth shown in this morning’s data.”

The Consumer Metrics Institute's Daily Growth Index, which measures consumer demand, is a leading indicator of GDP, and has rolled over to negative. The CEA commentary notes that the index points to where GDP will be 17-18 weeks later. In Nov09 the demand side began to contract, and predicted the lower 3.2% GDP result. It dropped so rapidly that a two week swing would have changed the GDP: two weeks earlier, at 4.4%, and two weeks later, at 2%. "This is the sign of an economy in rapid transition." The index is now projecting that Q2 will come in as a -1.5% contraction. They caveat that factories often are reluctant to shut down that rapidly, so the drop may slip out - inventory rebuilding in Q1 may result in days-inventory increasing at retail in Q2, which would cause a factory pullback over the summer and into Q3. Result: a double-dip sooner than expected:

The Big Picture reports on Bob Bronson's latest prediction, of a double-dip. Bronson focuses on the Core Business Cycle, which is the Final Private Product part of GDP (GDP less inventories and government spending). He takes Final Private Product and maps it in the next chart. It shows how the private sector has fallen - a lot farther than GDP itself indicates:

An interesting companion analysis on SeekingApha looks at "True GDP", or what GDP would have been without massive borrowing. Over the past three years, real GDP grew a cumulative 1.5%, or $200B. Unfortunately, the government borrowed an astounding $4T to gain that mere $200B of GDP improvement. It simply disguises a drop in True GDP of around 30%, and will slow future growth by having to be repaid. Simply put, we did not get enough bang for the borrowed bucks.

This line of reasoning is another exemplar of the Diminishing Productivity of Debt, that as we use debt like a drug to continue a faux economy, it has less and less value. Eventually more debt has no impact at all on GDP, a position Japan may have reached. Recent data from the Great Recession supports that thesis. If the government could borrow our way to prosperity, Greece would be China. While that isn't disputed, the argument for Stimulus is that borrowing and spending is required in a downturn, evan if it should not be used as medicine in an upturn. The True GDP argument is that it isn't working in a downturn, either, because each Dollar of debt results in less than a Dollar of real productivity. It gets slowly wasted in upturns, and rapidly wasted in downturns, as now.

The Big Picture adds another analysis, that the Conference Board also sees gloom, with the majority of people (60%) surveyed still expecting family income to go down. Only 10% expect it to go up.

The implications of slow-growth mode are rolling in:

Double-dip is more likely: the slow-growth mode is an "L" shaped recovery, but it raises the risk of a double-dip W. SocGen believes we rollover in six to nine months.
Unemployment should now get worse. It has been flat since Oct and may be slightly worsening already. An L-Shaped 2% growth (which is also being called a "square root sign" shape), is too slow to improve employment, and once the temporary census workers leave the rolls in a few months, the unemployment rate should rise.
Trade deficit is widening. Trade is now a drag on GDP, as imports are rising faster than exports. This may be a consequence of the commodities bubble echo, and could flip the other way if the bubble bursts, but that may not occur until the Dollar Carry Trade fades, since it is arguably fueling the bubble echo. The carry trade should last as long as the Fed keeps short term rates low.
Interest rates should rise. The deficit is deteriorating, with BofA projecting it it at 9% of GDP in 2010 and 7.5% in 2011, up from 5.2% (projected), pointing to higher long-term interest rates, further dampening business recovery.
PE Ratios may normalize. At 22 they remain at high levels, in part due to low interest rates (the PE in approximation is the inverse of bond rates) but also due to expectations of "rebound" growth (in effect buying forward today into year-end levels). Slow rebound means a more rapid normalization of rates to 15, which points to a 25-30% drop in equities.

Comments

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Bonjour Yelnik,
UNE vidéo ICI de Lakshman Achuthan, Il reste un Positif pour L'économique

http://weinstein-forcastinvest.net/lakshman-achuthan-directeur-de-lecri-reste-positif-pour-leconomie/

Posted by: Forcast | Tuesday, May 04, 2010 at 02:07 PM

Forcast, merci! Lakshhman made further comments today about his slowing ECRI index, saying he does not expect a double dip, and that his employment index is projecting jobs growth later in the year. http://theguruinvestor.com/2010/05/04/ecri-chief-double-dippers-will-be-wrong-again/

Posted by: yelnick | Tuesday, May 04, 2010 at 02:27 PM

All this means is that interest rates will remain LOW in the US. And the stock market will wind up being the beneficiary of such a rate environment, as low rates will provide for a "cushion" and bid in the market; garden variety corrections notwithstanding.

Posted by: marketman | Tuesday, May 04, 2010 at 02:38 PM