Don't Doubt the Double Dip
Neeraj Chaudhary
Euro Pacific Capital, Inc.
Sep 10, 2010
A few weeks ago Nouriel Roubini, widely regarded as one of the
more pessimistic figures on Wall Street, made headlines by raising
his forecasted likelihood of a "double dip recession"
to a terrifying 40%. The vast majority of "mainstream"
economists (although I would argue Roubini himself is part of
that pack) described these predictions as far too gloomy.
Although there are some dubious current statistics that the desperate
could cite to make an optimistic case, many simply are falling
back on the extreme rarity of past "double dips." But,
in an unprecedented time, the lack of historical precedent hardly
seems to matter. What is far more significant is a raft of new
data that points downward. As the high from last year's
monetary and fiscal stimulus wears off, there is a good deal
of evidence that shows the U.S. economy plunging into an abyss.
Unemployment continues to batter the nation. Last week alone,
the Labor Department announced that initial claims for unemployment
benefits fell to a mere 473,000. While US stock index futures
rallied briefly on this news, these numbers are not far off the
peak of the 2001-2002 recession.
We've spent trillions of dollars on bailouts, stimulus programs,
and Cash-for-You-Name-It programs, and we still have nearly half
a million new people filing for unemployment every week. As Billy
Joel would have asked: Is that all we get for our money?
Of course, unemployment typically lags in an economic recovery.
But the forward looking signs are no better. Recent data clearly
demonstrates that GDP growth is decelerating. After posting a
stimulus-inspired 5%+ growth rate in the fourth quarter of 2009,
GDP growth slowed to 3.7% in the first quarter of this year,
and then puttered to 2.4% in the second quarter (which was more
recently downgraded to a much more tepid 1.6%).
But even though GDP growth was marginally positive in Q2, the
growth rate of the ECRI's Weekly Leading Index (which measures
the prospects for future economic activity) just fell to -10,
a level it last hit at the end of 2008 - that is, during the
depth of the Great Recession when GDP fell the fastest. Even
during the second economic dip in the early 1980s, this measure
did not revert to this low level. Any objective view of this
data can only lead to one conclusion: this economy is sinking
fast, and all the government spending in the world won't keep
it afloat.
Under these circumstances, the Federal government would ideally
cut its size, in an effort to put more capital into the hands
of the private sector, thereby fostering more investment, production,
and ultimately more jobs in the economy. Regrettably, the Obama
Administration is preparing to do the opposite - the Bush tax
cuts of 2001 and 2003 are set to expire next year (effectively
raising taxes), and the economy will likely suffer as a result.
According to projections from the Congressional Budget Office,
higher taxes will raise an average of $380 billion per year over
the next 10 years; this translates into well over 2% of GDP annually,
at a time when nominal growth is decidedly below that mark. Even
an elementary school student can do the math - we're getting
ready to raise taxes by an amount more than the entire growth
of the economy; a renewed contraction should not surprise anyone.
With unemployment still high, growth slowing, leading indicators
signaling further weakness, and higher taxes on the horizon,
the only real hope for escaping a double-dip recession lies with
exports. If we were to experience a surge in our export sector
(while simultaneously holding steady or even reducing our imports),
our trade deficit could turn into a surplus, thereby bringing
growth to the economy. Indeed, President Obama himself recently
called for a doubling of US exports over the next five years.
But once again, the outlook for this sector of the economy is
bleak. Despite an improved July report released this week, the
overall drift of trade data for 2010 has not been encouraging.
At a time when the US badly needs trade surplus, monthly deficits
continue to average well north of $40 billion dollars. Unfortunately,
based on government policies that prevent industry from operating
more efficiently, export-led growth does not look to be in the
cards.
But, despite these clear and dramatic signs of mounting malaise,
most economists continue to forecast relatively solid economic
growth both now and in the future. According to the Third Quarter
2010 Survey of Professional Forecasters (released in mid-August
by the Philly Fed), economists expect real GDP to grow by 2.9%
this year, 2.7% next year, and will accelerate to 3.6% in 2012.
Given that the first half GDP is already well below
their forecast for the year as a whole, these economists are
therefore predicting a much better second half. If anyone knows
where this momentum can be found, please let me know.
But in my view, these economists are way off the mark. In reality,
the US economy is weak and deteriorating, and a renewed contraction
in GDP - whether officially labeled a "double-dip"
or not - is a near certainty. This is not your garden variety
recession. Don't expect it to behave like one.
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Sep 10, 2010
Neeraj Chaudhary
Investment
Consultant
Euro Pacific Capital, Inc.
website: www.europac.net
email: nchaudhary@europac.net
Neeraj Chaudhary is an Investment Consultant with Euro Pacific Capital. Opinions expressed are those of the writer and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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