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Thursday, January 06, 2011 9:39 PM


Rosenberg on the Non-Double-Dip; A Look Ahead to Second Half-2011 and 2012


The "Double Dip" for 2010 did not happen and one for 2011 now seems unlikely as well. However, a recession in 2012 is not out of the question. Dave Rosenberg explains in Breakfast with Dave

Can We See 4% GDP Growth For Q1? Yes, But Look For Air Pockets Thereafter

This is not a forecast as much as something that should be on the radar screen. Nor should this be considered a change in our fundamental view for 2011 as a whole — as a year of overall disappointment on the macro front. Be that as it may, the probability of a much stronger Q1 economic outcome has risen very recently.

Yes, you read that right. But why would that come as a surprise? We had near 4% GDP growth in the first quarter of last year (the consensus was little more than 2.5% going into that quarter) and by summer everyone was still talking about a double-dip recession and the stock market was beginning to price one in.

The points below show what it would take to get 4% GDP growth for Q1 — believe it or not, it is not a stretch to get there. With consumer spending at 3.5% (perhaps even higher), it doesn’t take much. The consensus right now is less than 3% (taken a month ago), but I would expect to see it revised up very shortly:

  • Consumer spending 3.5% (the impact of the payroll tax cut)
  • Residential investment 2% (the monthly construction spending numbers have risen modestly off the lows)
  • Non-residential spending 5% (the architectural billing index is consistent with this)
  • Capex 10% (still solid but moderating as the latest core orders data are predicting)
  • Net exports swing from $470 billion to $460 billion (net addition of 0.4%)
  • Inventories from $73 billion to $68 billion (drag of 0.2%)
  • Government 1.5%

Even if government is flat, the number for Q1 would still be 3.7% seasonally adjusted annual rate.

What is important is what happens in the second and third quarter when we see the U.S. economy hitting an important air pocket. In Q2, there is a loss of fiscal support at the margin. Moreover, we will be deeper into this renewed leg of the downturn of home prices, with negative implications for the household wealth effect, confidence, and spending. We will be seeing the peak impact from the runup in energy prices too. The inventory cycle has pretty well run its course as well (it was responsible for half of the GDP growth in 2010). It would also likely be prudent to assume that some risk aversion will resurface from the renewal of European debt concerns in March after the Irish elections (if the opposition party wins, expect the EU deal to be renegotiated and the debt to be restructured, and if that happens, look for other countries to follow suit). Of course, we have the debt-ceiling issue to contend with in March-April and the GOP are dangling $100 billion of spending cuts in front of the White House in order to get a deal done. This is not last year’s lame duck Congress. And this doesn’t add to uncertainty and possible disappointment in the second and third quarter?

The Fed is not going to be able to embark on more balance sheet expansion unless things were to get really ugly given the new Congressional oversight and the longer list of “hawks” that are FOMC voters ― this comes to a head in June and remember what happened last year when Mr. Market hit a pothole as the Fed contemplated its elusive exit strategy. It would be irresponsible to ignore these risks.

All we know about Q4 is that we should see a decent pickup in capital spending ahead of the end of the bonus depreciation allowance, which will merely create another problem for 2012 but the story here is (i) consumer-led first quarter, followed by (ii) air pockets in both Q2 and Q3, and then (iii) a capex-led fourth quarter. Moreover, a 2012 recession cannot be ruled out. In fact, elections are great years to have recessions: 1960, 1970, 1980, 2000 and 2008! How about that Mr. Potter?

The Real Cause For The Recent Exuberance

Personal income was revised up $46.3 billion in the second quarter. This was huge ― the Commerce Department found $46.3 billion for the consumer that it thought wasn’t there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people’s perceptions of how the economy was performing.

When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously.

This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday’s story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ― and likely Q3 as well ― to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don’t have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.
Change of Tune

I too thought a double-dip in 2010 or 2011 was likely. I changed my mind some time ago and made it theme number seven in Ten Economic and Investment Themes for 2011
7. US Avoids Double Dip

The tax cut extensions and the payroll tax decrease will keep the US out of recession. However, growth estimates are still too high. The tax cut extensions do nothing more than maintain the status quo while the payroll tax deduction is just for a year. Most will use it to pay down bills. Look for GDP at 2.0-2.5%. That is the stall rate.
There is no reason to stick with a forecast that is not going to happen. When retail sales picked up in November and continued into early December, that was it for me. I had significant doubts even before that.

Robust Jobs

On Monday, January 3, before the ADP numbers came out, in Factories Expand 17 Consecutive Months, Jobs Don't I discussed the possibility for a couple months of good jobs reports.
The BLS report for December comes out on January 7th. The January report comes out on February 4th. Those reports could be robust because of retail and service sector hiring, especially the January report.
Everyone is now going gaga now because Wednesday's ADP National Employment Report "suggests nonfarm private employment grew very strongly in December".

ADP has private-sector employment at +297,000.

The pertinent question, assuming the report is correct (I'll take the way under) is "how sustainable is it?" On this score I am in agreement with Rosenberg. I suggest not very, although next month or two could be good as well.

Bear in mind we had strong employment reports early last year, only to see them fade in the second half. Given that headwinds are enormous, I see no reason to change what I said in Jobs Forecast 2011 Calculated Risk vs. Mish.

Nor do I see any reason to change my long-term forecast that the US slips in and out of recession or near-recession and deflation for a number of years, just as Japan did.

Little has changed except a massive amount of stimulus delayed the double-dip. What can't go on forever won't and I doubt if this Congress is very accommodating to states in trouble.

Economic forecasts for 2010 ranged from hyperinflation to strong growth and strong inflation, to weak growth and strong inflation, to weak growth and minimal inflation, to weak growth or double-dip accompanied with deflation (my call), to outright economic Prechter-like collapse.

Those in the hyperinflation and strong inflation camps missed the mark by a mile. Mid-year it looked like the US was headed back into deflation but QEII forestalled that.

Giving credit where credit is due, those in the weak growth and minimal inflation camp got the 2010 call right. There were not many in that camp, but Calculated Risk was one of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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