Worst GDP growth in USA since 1946

Posted on 27 February 2010 with no comments from readers

You have to go back to the year following the Second World War for a comparable fall in GDP to last year in the USA. Overall GDP fell by 2.4 per cent in the world’s largest economy.

By the fourth quarter an unprecedented stimulus package and near zero interest rates brought the economy back to life. But inventory restocking – after a run down in stock levels – accounted for most of this growth.

Rebound over

The question is whether this growth is sustainable going forward. The signs are not good. First quarter sales have been hit by exceptionally bad weather, quite apart from the bad economy.

The US dollar has also been rising – due mainly to the poor economic health of Japan, Europe and the USA – and that is bad for US exports.

What has also greatly aided the bailout has been a surge in financial markets from the bottom last March. Whether this has been overdone is almost to ask a silly question.

Stocks are up 70 per cent in the worst year for GDP growth in 64 years. How is that for contrarian thinking by investors? It leaves considerable room for almost immediate disappointment.

Where is the catalyst to drive this recovery? Inventory rebuilding will be over in the first quarter. New and existing home sales are coming in below expectations. Long-term unemployment is rising. Consumer sentiment is weakening, not getting stronger.

No we should rather be wondering what is the catalyst for a double-dip back into recession. Is it not obviously going to be the very financial markets that were so helpful last year and have now over played their hand?

Catalysts multiply

There is no shortage of possible catalysts to send markets lower, besides disappointing financial results. The Bank of China fears a reversal of the dollar carry trade, worth $1.5 trillion and bigger than the yen carry trade ever became.

Certainly any hint of higher interest rates threatens to get this money pulled out of riskier asset classes, like equities.

Surely the point at which the downside risk to financial markets greatly outweighs any further potential upside must be close, and given the ongoing rally in the US dollar and bonds the sell-off must be near.