Yes, Technical Recession May Now Be Over... But Where Does That Leave Us?
A Tale of Two Depressions
"Contained" and "Uncontained"
Yes, it is true that government stimulus has pulled us back from the precipice of a Greater Depression, or even worse. GDP that had been falling at back-to-back quarterly rates not seen since the 1930s, gave way to a quarterly decline more on par with the average post WWII recession, during spring of this year. (See graph below)
US GDP (Updated with Benchmark Revisions)
But while government stimulus was arguably required to save us all in the near term, what government spending giveth upfront, government spending often tends to taketh away at some later date. Research by Bridgewater Associates suggests that this pay-back will start to net out an outright negative contribution to GDP at the start of 2010, and become even more pronounced, pervasive and persistent during the second half of next year. (See graph below)
Estimated Growth Contribution (+/-)From Govt. Stimulus
Clearly, government spending helped fuel this massive improvement from a quarterly annualized growth rate of -6% to "just" -1%. Reasonable estimates I have seen strongly suggest that GDP would have come in around -3% to -4% during the second quarter without it. And for the rest of this year, with the stimulus still funneling in - coupled with the inventory rebuild that we are now already witnessing and quite possibly going to see much more of - Qs 3 & 4 may have annualized GDP rates north of 2%, 3%, possibly even higher than 4%!
But, once this inventory rebuild cycle is over, say about winter or spring of 2010... unfortunately, if Bridgewater and many others who are pointing this out are right, not only do we risk seeing consumers continue to be tapped out and spending less (thanks in no small parts to high unemployment, wage deflation, the end of their extended unemployment benefits, ongoing foreclosures, etc.) ... but we also risk seeing the net contribution of all this government stimulus turn negative at around the same time.
So, we can call this potential toxic mix the 2010 Axis of Evil:
1. Inventory rebuild eventually comes to an end. Net flat to negative contributions to GDP for the rest of 2010.
2. Consumers continue to retrench, much as they did in Japan throughout the 1990s, and here in the US during the '30s.
3. Government stim begins exacting some of that payback out of the economy.
4. Home prices start to roll back over - or, if the current "stabilization" does indeed turn out to have been a brief head-fake, home price declines begin accelerating more in 2010.
5. Commercial real estate continues to implode.
Many bulls continue to point out that the stock market is the best leading indicator, and that it is up about 40% - 50% since its Depression-fueled lows of earlier this year, suggesting a recession that is over with a "V" shaped recovery now definitely ahead.
Well, maybe. Just don't forget that after the crash in 1929 we saw a 52% bounce into June of 1930, and even some tangible improvement in the economy that lasted a few quarters, too. Then, in 1931 the markets and the economy really took a dump again. Similarly, Japan bumped along with a few up periods since their big bust in the early 90s... but have struggled with deflation and falling in and out of frequent recessions ever since.
Do similar fates still await us.
"Contained" and "Uncontained"
Yes, it is true that government stimulus has pulled us back from the precipice of a Greater Depression, or even worse. GDP that had been falling at back-to-back quarterly rates not seen since the 1930s, gave way to a quarterly decline more on par with the average post WWII recession, during spring of this year. (See graph below)
US GDP (Updated with Benchmark Revisions)
But while government stimulus was arguably required to save us all in the near term, what government spending giveth upfront, government spending often tends to taketh away at some later date. Research by Bridgewater Associates suggests that this pay-back will start to net out an outright negative contribution to GDP at the start of 2010, and become even more pronounced, pervasive and persistent during the second half of next year. (See graph below)
Estimated Growth Contribution (+/-)From Govt. Stimulus
Clearly, government spending helped fuel this massive improvement from a quarterly annualized growth rate of -6% to "just" -1%. Reasonable estimates I have seen strongly suggest that GDP would have come in around -3% to -4% during the second quarter without it. And for the rest of this year, with the stimulus still funneling in - coupled with the inventory rebuild that we are now already witnessing and quite possibly going to see much more of - Qs 3 & 4 may have annualized GDP rates north of 2%, 3%, possibly even higher than 4%!
But, once this inventory rebuild cycle is over, say about winter or spring of 2010... unfortunately, if Bridgewater and many others who are pointing this out are right, not only do we risk seeing consumers continue to be tapped out and spending less (thanks in no small parts to high unemployment, wage deflation, the end of their extended unemployment benefits, ongoing foreclosures, etc.) ... but we also risk seeing the net contribution of all this government stimulus turn negative at around the same time.
So, we can call this potential toxic mix the 2010 Axis of Evil:
1. Inventory rebuild eventually comes to an end. Net flat to negative contributions to GDP for the rest of 2010.
2. Consumers continue to retrench, much as they did in Japan throughout the 1990s, and here in the US during the '30s.
3. Government stim begins exacting some of that payback out of the economy.
4. Home prices start to roll back over - or, if the current "stabilization" does indeed turn out to have been a brief head-fake, home price declines begin accelerating more in 2010.
5. Commercial real estate continues to implode.
Many bulls continue to point out that the stock market is the best leading indicator, and that it is up about 40% - 50% since its Depression-fueled lows of earlier this year, suggesting a recession that is over with a "V" shaped recovery now definitely ahead.
Well, maybe. Just don't forget that after the crash in 1929 we saw a 52% bounce into June of 1930, and even some tangible improvement in the economy that lasted a few quarters, too. Then, in 1931 the markets and the economy really took a dump again. Similarly, Japan bumped along with a few up periods since their big bust in the early 90s... but have struggled with deflation and falling in and out of frequent recessions ever since.
Do similar fates still await us.