Double Dipping – US Back in Recession

Sings, signs, everywhere a sign. The evidence is now in that even by official standards the US has slipped back into recession. NBER is usually 6 months to a year late when it comes to calling recessions, so don’t hold your breath for their announcement anytime soon.

Doug Short writes in Will the “Real” GDP Please Stand Up?

[This chart] adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI):

… two quarters in the red, that’s a recession right there!

Futhermore, Wells Fargo reports that 12 states are in contraction, one is already likely to be in recession:

A report from Wells Fargo says Alabama’s economy has likely fallen into a recession, but two economic experts in Alabama have a different outlook.

The report from the San Francisco-based bank said Alabama was one of 12 states experiencing an economic contraction in July and “likely slipped into a recession.”

The report, written by senior economist Mark Vitner and economist Michael A Brown, said more states “are likely to fall into negative territory within the next six months” because of a persistent decline in manufacturing jobs.

Consumer confidence has plummeted to the lowest level since April 2009, in its biggest drop since October 2008:

Confidence among U.S. consumers plunged to the lowest level in more than two years as Americans’ outlooks for employment and incomes soured.

The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.

A few more quarters and NBER will likely back-date this fresh new recession to Q2 or Q3 of 2011.

Some more I wrote about the inevitability of a double dip recession:

Money Supply – November 2009

The Great Depression 2.0

Gross Domestic Product Q4 2009 Updates; True GDP & Consumption as Percentage of GDP

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Durable Goods Orders Down by Most in 6 Months

Bloomberg writes Durable-Goods Orders in U.S. Dropped 3.6% in April, the Most in Six Months:

Orders for U.S. durable goods dropped more than forecast in April, reflecting a slump in aircraft demand and disruptions in supplies of auto parts stemming from the earthquake in Japan.

The 3.6 percent decrease in bookings for goods meant to last at least three years was the biggest since October and followed a 4.4 percent surge in March that was larger than previously estimated, a Commerce Department report showed today in Washington. Economists projected a 2.5 percent April decline, according to the median forecast in a Bloomberg News survey.

We shall see if it was really just Japan’s quake that dragged this number down so severely.

European economies are slipping into recession or about to default, the Chinese Production Engine Begins to Stutter, Japan’s debt and pension crisis has entered its final stage, the US is in fiscal gridlock with no end in sight for the housing slump … excuse me but could it be that there is a global slowdown underway, setting the stage for a double dip?

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Spending Freeze, Fed Scepticism, Political Gridlock a.k.a. “Hitting a Wall”

Markets have been sending stronger signals over the past few days:

  • The Dollar has continued to extend its rally as expected.
  • US stocks have dropped by over 5% in very short time
  • Chinese and other foreign stocks are beginning to lose ground again after a short bounce

Economic data most recently indicated that existing home sales suffered the biggest slump in 40 years:

Sales of previously owned homes took their biggest tumble in at least 40 years last month as the impact of a buying spree spurred by a tax credit for first-time buyers waned, according to industry data released Monday.

Those who rushed to meet the original November deadline to take advantage of an $8,000 tax credit for first-time home buyers caused a surge in sales earlier in 2009, but left the market wobbly by the end of the year. First-time buyers, who made up more than 50 percent of sales earlier last year, represented just 43 percent of the market in December. The shift also resulted in fewer sales of lower-cost homes, which first-time buyers typically seek.

After three months of increases, sales of existing homes, including condos and single-family residences, fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million in December compared with the previous month, according to National Association of Realtors data. That was a bigger drop than analysts had expected and the lowest sales rate since August. It was also the biggest monthly decrease on records that date to 1968, according to the industry group.

The December decline “was payback for the tax credit,” said Patrick Newport, an economist for IHS Global Insight.

… once the tax credit incentive vanishes home prices will head south again, this is really something that intuitively nearly everyone I talked to knew from the get go, the only question is how much longer Congress wants to keep extending it. It seems like they don’t have a whole lot more to play with.

Today, the Obama administration leaked plans for a spending freeze:

President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, including air traffic control, farm subsidies, education, nutrition and national parks.

Last but not least, there is growing skepticism among lawmakers about Ben Bernanke and of course the Federal Reserve in general:

Even if Mr. Obama and the Senate majority leader, Harry Reid, get the 60 votes necessary to surmount a threatened filibuster against Mr. Bernanke, the Fed appears to have taken a hit to its reputation.

“The public’s confidence in the Fed has been dramatically eroded, and that’s not good,” said Laurence H. Meyer, a former member of the Fed’s board of governors who runs a consulting firm, Macroeconomic Advisers. “The vulnerability of the Fed to a loss of independence is higher than it’s ever been. And the chairman’s credibility with Congress is very low, and that’s not good for the institution.”

… but of course good for the American people, I may add.

Not that any of the things I outlined above will change anything as far as the general direction of government growth and power grabbing is concerned. But in the short run it clearly looks like they are hitting a wall right here and now, at least it is hard to find many signs to the contrary.

As I explained before:

The key thing to keep in mind in all of this: The recent rally, green shoots, and recovery hopes have been created and/or fueled by massive government expenses, and by a believe in the omnipotence of our leaders in Washington.

But government spending sprees, too, will have to come to an end sooner or later. On top of that, all that the recent government programs have accomplished is to get marginal individuals back to the same flawed habits, such as owning unaffordable homes, buying too many cars, etc.

The interest that the government has to pay on its debts when it runs up sky high deficits, and the taxes it will have to raise in order to make those payments, will be hanging over the recovery like a Damocles Sword. The Federal Reserve, too, will be faced with a similar situation. Let’s assume, for the sake of the argument, that lending activity on homes, cars, etc. were to pick up again. What will the Fed do then? Cut interest rates? Add more bank reserves? Surely not, quite the opposite.

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.

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Money Supply – December 2009 – Early Double Dip Recession Signs?

money-supply-december-2009

The true money supply has grown to $2,232 billion in December 2009.

The annual growth rate has now slowed down to 3.2%:

money-supply-growth-december-2009

A sustained drop below 3% is most of the time a good recession indicator. Given that we are still in a recession which may be declared over soon, this may be just another indicator of the coming double dip recession, as I have outlined a few days ago.

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Obama Prepares US For Double Dip Recession

When you are meeting your biggest creditors, you better strike a disciplined tone, thus Obama warns on US public debt pile:

US President Barack Obama warned that the US economy could head into a “double-dip recession” unless urgent steps were taken to rein in mounting public debt.

The US president’s remarks – in an interview with Fox News in Beijing on Wednesday, towards the end of his eight-day tour of Asia – marked his strongest language yet on the necessity of putting public finances back on a sound footing.

“It is important though to recognise if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession,” said Mr Obama.

A 10.6 per cent plunge in housing starts in October – led by collapse in the apartment business – highlighted the dilemma facing him as he seeks to tackle the deficit without undermining a fragile economy.

“It’s about as hard of a play as there is,” Mr Obama said, adding that his team was trying to set up a “pathway long term for deficit reduction” without pulling a lot of money out of the economy in the short term via tax rises or spending cuts.

The mood in the US has already swung in favour of deficit reduction, with Republicans attacking Democrats’ plans for more spending to support jobs.

Washington-based analysts said the president was probably trying to prepare public opinion for a tough budget in February – while leaving open some space for measures to reduce unemployment, now at 10.2 per cent.

It is obvious that the public has had it with excessive spending and deficits. That didn’t seem to worry the President much so far. But the Chinese government must have clearly made him understand that they have had enough as well.

The government is beginning to hit a wall. There is not a whole lot further it can go in the short term at this point. This is not to say that they will suddenly embrace true fiscal responsibility and start paying down the public debt. That will most likely continue to pile up for many years to come, just as it did in Japan. But they need to get the ongoing shortfalls of revenue vs. spending under control, hit the breaks, slow down the additions to the debt.

The worst of all is that all the recent spending sprees have made things a lot worse, artificially created demands for goods that we simply didn’t need any more of, propped up prices that needed to continue to fall, revitalized irresponsible habits that needed to end.

It is a truth that they won’t be able to get around, as I pointed out before:

The key thing to keep in mind in all of this: The recent rally, green shoots, and recovery hopes have been created and/or fueled by massive government expenses, and by a believe in the omnipotence of our leaders in Washington.

But government spending sprees, too, will have to come to an end sooner or later. On top of that, all that the recent government programs have accomplished is to get marginal individuals back to the same flawed habits, such as owning unaffordable homes, buying too many cars, etc.

The interest that the government has to pay on its debts when it runs up sky high deficits, and the taxes it will have to raise in order to make those payments, will be hanging over the recovery like a Damocles Sword. The Federal Reserve, too, will be faced with a similar situation. Let’s assume, for the sake of the argument, that lending activity on homes, cars, etc. were to pick up again. What will the Fed do then? Cut interest rates? Add more bank reserves? Surely not, quite the opposite.

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

What is the Fed doing?

Is there much more it can do at this point? Have you heard them announce any more of their great new lending facilities in recent months?

Most notably, the Fed has begun to repay the Treasury’s investment made at the end of last year, the so called Supplementary Financing Account. It had been hovering at around $200 billion for the previous 8 months. It has now dropped to $19 billion as per the latest weekly reports. It may be completely dissolved by the end of this month. This, to me, is one of the biggest signs that even the Fed itself has begun to wind down stimuli and is trying to get its books in order, if such a thing is even possible…

Here is Meredith Whitney’s take on the coming double dip recession:

What about private lending?

Well, forget about that one. Loans and credit are drying up at an unprecedented pace, and have just turned negative for the first time in AT LEAST 35 years:

Total US Credit and Loans have now contracted by $979 billion since their peak in October 2008:

total-credit-September-2009

The annual growth rate has turned negative for the first time since beginning of the the weekly recordings, and and as far as I could find now posts the biggest annual decline since the great depression:

total-credit-annual-growth-september-2009

Keep in mind that all this has happened in spite of an environment of renewed optimism and confidence that the economy will bounce back hard.

The biggest surprises and catastrophes always occur when public opinion is completely out of whack with reality. Now is such a situation. How much longer it will last no one knows. But rest assured that a double dip is on the horizon…

… and that horizon is fast approaching.

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