Has the US double dip recession already started?
Posted on 28 September 2010 with 5 comments from readers
Recessions are not normally announced until long after they have started. Today Agora Financial goes so far as to suggest that the double dip in the US economy has already begun, and it will just be a matter of time until this is acknowledged.
The celebrated newsletter publishing house notes that the M3 money supply is the best predictor of recessions and that it turned negative nine months ago, the standard time lapse between a fall in M3 and a recession.
M3 indicates recession
This graph from Shadowstats.com shows that whenever annual growth in M3 has turned negative, a recession always has followed, usually within six-nine months:
The Agora Financial’s 5 minute forecast today also contains some aprocryphal quotes from the former Fed chairman Alan Greenspan speaking last Friday:
‘We are now at a state where excluding World War II, we are in the worst shape of relationship between borrowing capacity and debt, I suspect, since 1791… We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk…
‘In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem. Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious depression’.
Weak data
ArabianMoney can only add that from our perspective sat thousands of miles away in Dubai that the recent US economic data is not very encouraging, and appears more like a Wall Street spin to sustain a September rally than anything more concrete about a recovery.
Durable goods orders last week, for example, fell. They only rose if you exclude transportation items like aircraft. So does a slowing in new orders for aircraft not mean anything? Surely aircraft are pretty important for US exports.
Then we have the terrible housing data, and the known outlook for millions more foreclosures. Unemployment remains stubbornly high. Private sector investment remains low. Retail sales remain weak. And what Greenspan says on US indebtedness is absolutely right.
The official debt-to-GDP ratio of the United States is currently 65 per cent. However, when all liabilities are included the real debt-to-net GDP ratio is 360 per cent, making the US more insolvent than Greece.
Meanwhile, in the background the European debt crises are far from over and Japan is wallowing in deep recession. And those leading US economic indicators are still negative even if there was a slight uptick in the past month. Could the US economy already be contracting? Well, does it look like it is expanding?
5 Comments posted by readers:
Anyone else notice how countries are starting to try and devalue their currency faster than the other fellow. Helicopter Ben Bernanke is warming up his turbine for more QE. Japan is in the FX market pushing down the yen. Some official from Brazil said his currency is getting too rich. When will it end, and how?
Paul B. Farrell has just written another PRICELESS article on http://www.markerwatch.com.us about the coming Second American Revolution after the economic collapse. I’m not saying he is correct, but every investor should certainly read his opinion. After witnessing what has happened in American politics and finance during the last 30 years, I must admit that it is hard for me to find fault with his logic.
And peak oil won’t help.
Has the Bottom Been Reached?:
During the month and a half from August 1 to September 15, our Weighted Composite Index has improved substantially, rising from recording a year-over-year contraction rate in excess of 9% to recently registering a contraction rate near 3%. This is the largest positive movement that we have seen over half of a quarter since late 2009. The improvement has stopped (at least temporarily) the decline of our 91-day trailing quarter average (our Daily Growth Index):
Our Daily Growth Index reached a -5.86% contraction rate on September 12, which was fully 97% as bad as the worst contraction rate reached during the “Great Recession of 2008″ (-6.02% on August 29, 2008). A calendar quarter of comparable GDP growth has occurred among only 1.29% of all quarters of U.S. GDP growth recorded by the Bureau of Economic Analysis of the U.S. Department of Commerce, since the spring of 1947. This corresponds to level of contraction that should be expected only once in 19.4 years, and it comes close on the heels of the 2008 contraction that should occur only once in every 21.4 years.
One of the tools that we have used to monitor the 2010 contraction event is a chart that we call our “Contraction Watch,” which overlays graphically the day-by-day progression of the current 2010 contraction onto the “Great Recession of 2008″:
(Click on chart for fuller resolution)
In the above chart the two contractions are aligned on the left margin at the first day during each event that our Daily Growth Index went negative, and they progress day-by-day to the right, tracing out the daily rate of contraction. This chart conveys important information about the 2010 event, in particular how it differs in profile from the “Great Recession of 2008.” It has now lasted three weeks longer than the “Great Recession” and is perhaps only just now forming a bottom. Furthermore, that bottom is very nearly as low as the one experienced in 2008. Even if the 2010 contraction immediately starts to retrace the recovery pattern seen in 2008, we should expect at least another 120 days or so of net contraction before the consumer portion of the economy is growing once again.
We have previously pointed out that the true severity of any contraction event is the area between the “zero” axis in the above chart and the line being traced out by the daily contraction values. By that measure the “Great Recession of 2008″ had a total of 793 percentage-days of contraction, and its severity can be visualized as the amount of area covered by the red stripes in the chart below:
Similarly, the current 2010 contraction has just reached 592 percentage-days, and its severity can be visualized as the amount of area covered by the blue stripes in this chart:
The blue stripes above already cover about 75% of the area covered by the 2008 “Great Recession”, and the curve has only just begun to start back up. Looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience another 466 percentage-days of contraction before ending — resulting in a grand total of 1058 percentage-days of contraction for the 2010 event, fully 33% more severe than the “Great Recession of 2008.” This, of course, assumes that stimuli comparable to those seen in 2008-2009 will be available to cause such a recovery during 2010-2011 — and that unemployment quickly returns to the levels that helped consumer demand start to rebound in late August of 2008: about 6.1%. Absent fresh consumer stimuli and dropping unemployment rates, the consumer demand contraction we are witnessing could very well linger.
Over the past month and a half we have seen a substantial reduction in the year-over-year contraction of consumer demand. That said, it is important to remember that consumer demand is still contracting, albeit at a slower rate. We have previously used the analogy that our data is far “upstream” in the economy. We are sampling the behavior of internet shopping consumers on a daily basis. Those consumer activities flow “downstream” to factories over the course of weeks or quarters. It’s not unlike being upstream on a great river and watching a water-level gauge predict that downstream communities will be flooding catastrophically in a few days or weeks. Although our flood-gage may have just peaked, the downstream damage remains inevitable — it simply hasn’t arrived yet.
Ed Note: A shorter comment would be appreciated (and without reference to charts that cannot be used in this comment system) but this basically seems to argue that damage to consumer demand is not yet played out and close to 2008 levels.
A “double dip” recession was only a matter of time, and it’s likely that we’re already in it, though the Obama administration’s spin doctors are proclaiming from the roof-tops that the recession ended last year. Yeah, right!
There are massive structural problems that our elected officials refuse to address. Additionally, there is no consumer confidence, nor investor confidence; everything is being manipulated by the US government (principally the FED and the Dept. of Treasury!) “behind the scenes”, much like the Wizard of Oz. The investor public certainly knows this, and a growing number of “average” citizens know it as well. Hence the acceleration in the lack of confidence.
Without a doubt, the US needs a massive economic overhaul, without which the US economy will either: a) continue to languish… or more likely, b) continue to fall precipitously.
@Sandman:
Interesting commentary, with much food for thought . . . but can you provide a link to the graphics you referenced?
@obewon – the “contraction watch” chart can be found at this link:
http://www.consumerindexes.com/
(about half way down the page…)
Thanks, Eric