Double Dip — Or Just a Soft Patch ?

Our story so far: Economists as a group, completely missed the oncoming credit crisis, recession, and market collapse. In the beginning of 2009, they did not discern the economic revival. They sure as hell missed the March 2009 market bottom and forthcoming 78% rally.

Now, with Q2 of 2010 coming to a close, many have begun chattering about a double dip recession. A Google search for double dip recession generates 3,470 recent news items.

While I suggest you ignore those forecasters who — repeatedly — got it wrong, let’s at least look at the data to see what has the dismal crowd all hot and bothered.

Over the past year, a combination of pent up demand and Federal largesse created an initial spike in various sectors: Retail sales, housing activity, autos, and of course technology. However, the initial pop is now fading.

As the data confirms, there can be no doubt we have entered a soft patch. Indeed, the following data points confirm a general slowing:

• Jobs: Private sector hiring cooled off last month, with just 41,000 hires;

• GDP grew at a 3% in Q1 2010, down from 5.6% Q4 2009.

• Europe: The problems in Greek Spain and Hungary are likely to lead to significant austerity measures in Europe. Expect the Continent to see anemic growth at about 1% GDP, and that can shave 0.5% off of US GDP.

• Retailers showed a disappointing May, making no gains (outside of Autos).

• Homebuilders sentiment and mortgage apps have plunged, following the expiration of the home buyer tax credit.

• China appears to be guiding its credit and real estate sectors to slower growth.

• Conference Board Leading Economic Index (LEI) fell in April by 0.1% — the first downturn since March 2009; (May data wont be out for another 2 weeks, but it also appears to have softened).

• Dr. Copper looks pretty sorry, as commodity prices plunge worldwide.

• Unemployment claims were declining, but that progress seems to have stalled

This is, historically speaking, normal. ECRI’s Lakshman Achuthan told Newsweek: “You always have a spurt in growth out of recession and then you throttle back. But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”

That “pronounced, pervasive, and persistent decline” is simply not present. Indeed, double dip recessions are actually rather rare. As Yale Professor Robert Shiller pointed out in a recent Sunday NYT article, “When inflation-adjusted G.D.P. has come out of a decline and posted three or four quarters of gains, it has never immediately begun to fall again — at least not since quarterly numbers began to be issued in 1947.”

And that is what we have had — a year of improving GDP. Following the initial surge in data off of the lows, we have entered a slowing phase of the recovery.

The key factor regarding all of this slowing data is that it is suggestive of an economy that will continue to expand, albeit at a slower pace. None of this data is highly aberrational, and none of it is consistent with past double dip recessions.

Indeed, even Capex and employment plans for the upcoming year show a potential upswing. ISI reports  that their mid-year survey of CFOs shows the percentage of companies planning to boost their capex & hiring in 2010 has increased markedly. This would be heading in the opposite direction if we were on the verge of a double dip recession.

So then why all this sturm und drung? Newsweek’s Dan Gross sums up the cause of the residual bearishness of the dismal set:

“The concern about a double dip is largely a function of what I’d call residual bearishness. Stung by excessive optimism in 2007, the econo-pundit community remains in a reflexive, dour crouch. Since it began in the spring of 2009, this recovery has been widely disbelieved and dismissed. Fretting about the double dip is as much about where we’ve been as where we are.”

Ironically, it is the new breed of Deficit Hawks are the ones pushing for a double dip recession. After decades of profligacy, they now seem to want fiscal austerity in the United States — just when the economy is most vulnerable. They apparently have failed to learn the lessons of 1929-33 and 1937-38. The time for balanced budgets and fiscal prudence is during the expansion phases of the economy — and not the post recession period where after an initial spurt, growth is beginning to slow.

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Previously:
The Great Recession Is Over But Hold the Confetti (December 21st, 2009)
http://www.ritholtz.com/blog/2009/12/the-great-recession-is-over-but-hold-the-confetti/