Friday, August 20, 2010

US GDP contracted in May & June

As a follow up to my view that a double dip has started(if indeed the recession truly ended- I don't believe it did!). Courtesy of Gluskin Scheff's David Rosenberg, whose awesome daily publication is free(!!):

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.
As I stated in June:

I believe that double dip has likely started. Yes, I know that economists have solid growth projected for 2010. I listen to the market, which is speakly very loudly right now. By the time, these bookish economists wake up, the S&P will be at 850.

As the great Bob Hoye has researched, in a post-bubble credit contraction, the economy and stock market often peak at the same time. The high in the 1873 and 1929 stock market was was September, and the respective depressions started in October and August respectively. In 2007, the stock market peaked in October, the recession started in December.

This clear peak in April, if it holds and if the stock market continues to sell off, likely means that a double dip has either started or will start very soon.
Now, I incorrectly thought that we would hit 950 in July (the lowest was 1010), but I have not changed my view about 850 by October as a recession becomes factored in as a possibility by the economists on Wall Street. Currently, they are bringing their numbers down to the slowdown camp. There are few forecasting an outright recession at this point, despite the fact that Q2 GDP will be revised down to 1.5% and Q3 looks even worse.

Now that Macroeconomic Advisers has put out a negative number for May/June, this lends credence to what I stated. The horrible economic data of recent weeks is also further confirming my suspicion that as is typical in a post-bubble credit contraction, the economy and the stock market peak at the same time. Using ISM as a guide for monthly GDP, it peaked in April. So did the S&P at 1220.

A double dip recession is by no means confirmed, but it is becoming more and more likely by the day.

Disclosure: Positions in HSD, SDS and related options

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