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President Barack Obama and his family hike on Cadillac Mountain at Acadia National Park in Maine, July 16, 2010.
Milton Ezrati,senior economist and market strategist,
at US brokerage,
Lord Abbett, says it seems these days that half the headlines
in the financial media fear a double-dip recession, as do half the
conversations on Wall Street. There certainly are risks, not least in
Europe’s financial difficulties. But still, there are reasons to question
such widespread concerns. He says history, after all, offers only one true
double-dip experience, and that grew out of a policy error. More, the actual
data on the economy fly in the face of such an outlook. Following are seven
reasons to doubt the double-dip outlook.
1. The Consumer Seems Firm Enough:
At some 70% of the economy, the American consumer almost
always calls the general tune, and here, the picture is one of relative
strength. To be sure, the market took it to heart when reports some weeks
ago showed that retail sales in May dipped by 1.4%. But that sales decline
followed a powerful 10% advance in retail sales during the prior 12 months.
Had the consumer not paused, it would have been worrying. Meanwhile,
broader-based measures of personal outlays have expanded moderately
throughout. The 2.4% annual rate of expansion registered for overall outlays
in May was slightly slower than the 4.2% annual rate of expansion recorded
for the prior six months, but still, that was a slowdown not a decline.
More telling fundamentally, household income has risen
sufficiently enough to support future spending. Overall personal income rose
at an annual rate of 5.4% annual last May (the most recent month for which
data are available), actually accelerating from the 4.4% annualized rate of
advance during the prior six months. Meanwhile, the personal savings rate,
at 4.0% of aftertax income, generates a $454 billion annual flow of new
money from which households can pay down debt even as they maintain existing
levels of spending. If income continues to expand, as is likely, households
will have the wherewithal to continue that "de-leveraging," even as they
increase spending. All they need do is keep outlays from growing faster than
income—a circumstance that should easily support at least moderate spending
2. Housing Data Are Misleading on Two Sides:
The $8,000 first-time homebuyer’s tax credit has played hob
with monthly housing statistics and investor perceptions of the sector’s
fundamental strength. Of course, it was always ridiculous to suggest, as
Washington did, that the credit would prompt someone to purchase a house.
Even those with the most backward approach to financial matters would resist
taking on a $200,000 debt to save $8,000 on taxes. But for those who
otherwise would have bought a house, the homebuyer credit could and did
affect the timing of purchases.
Thus, as the first expiration of the credit approached last
November 2009, many who were otherwise looking for a new home crowded their
purchases into the eligible period. Not surprisingly, home buying surged in
October and November. But since many of these hurried sales would have
otherwise occurred in December, January, and February, new purchases in
those months dropped by more than 12%. Something even more extreme occurred
as this latest expiration date approached in April 2010. People who were
looking crowded their purchases into March and April in order to qualify for
the credit, driving up home sales by almost 30%. Then, because so many of
those sales would have occurred after April, recorded sales fell suddenly by
about 30% in May. Housing starts and residential construction put in place
followed this same up-and-down pattern.
Discussing the four things
that people are overlooking in the markets, with Milton Ezrati, Lord Abbett;
Gary Shilling, A. Gary Shilling & Co. and CNBC's Bob Pisani:
But none of this says anything fundamental about the housing market. There,
the more significant consideration is the drop in the inventory of unsold homes
by 27%; in fact, during the last 12 months, from the equivalent of 13 months’
supply during the 2008–2009 crisis to about eight months’ supply more recently.
This development fundamentally has lifted previous downward pressure on new
construction, sales, and pricing. According to the National Association of
Realtors, for instance, the median sales price of homes sold
in the United States has risen 5.3% so far this year, and prices continued
to rise in May. It will be a long while before residential real estate
becomes a good investment, but the price pattern nonetheless suggests that
the market has easily compensated for the gyrations surrounding the tax
3. Business Spending and Exports Are Awfully Strong for a
If business is anticipating a second dip in the economy, it
has chosen a strange way to show it. To be sure, firms have held back on new
construction, hardly surprising given the low level of capacity utilization.
So far this year, nonresidential construction spending has dropped by 2.1%,
or at an annual rate of 5.0%. But business managers cannot be too
frightened, for they are spending heavily on new equipment. Shipments of
capital goods (excluding defense materials) rose at a 3.0% annual rate
during April and May—the same pace they have maintained during the past 12
months. More telling of expectations than actual shipments, new orders for
such capital goods exploded at a remarkable 48.3% annual rate during this
supposedly weak April–May period—a tremendous acceleration from the already
rapid 25% rate of expansion during the prior 12 months.
Meanwhile, business also has begun to rebuild inventories,
presumably in anticipation of future sales growth. Stocks of finished goods
on hand rose at a 6.0% annual rate between March and May (the latest month
for which data are available), and work in progress increased at a 4.3%
Exports also showed strength. So far this year, through
April (the latest month for which data are available), total U.S. exports to
the rest of the world have expanded at an impressive annual rate of almost
17%. In April, they jumped at a 12.7% annual rate. That kind of growth will
not only help spur the overall U.S. economy but it also argues that the
world economy is far more robust than double-dip arguments suggest. As a
take on domestic U.S. demand, it is noteworthy that imports have expanded at
a 23.5% annual rate so far this year, a pace they held in April. Clearly,
someone in this economy is buying.
whether Bernanke will give the economy another downgrade, with Peter Navarro,
University Of California; Vincent Reinhart American Enterprise Institute; Milton
Ezrati, Lord Abbett and Gary Shilling, A. Gary Shilling & Co:
4. Overall Production Levels Look Fairly Good, Too:
More general measures of economic activity also cast doubt
on the double-dip outlook. Industrial production, for instance, continues to
rise at impressive rates. The year-to-date rate through May (the most recent
month for which data are available) has seen this measure of output in
factories, mines, and utilities rise at an annual rate of more than 8%, and
in May, the pace actually accelerated to an annual rate of more than
15%—clearly unsustainable, but quite the opposite of weakness, much less a
double-dip. Similarly, the Purchasing Managers Index (PMI)1
of the Institute of Supply Management shows continued
growth. To be sure, the index fell in May and June (the most recent months
for which data are available), to a level of 56.2 from an April level of
60.4. But since any reading above 50.0 speaks to economic expansion, even
the lower figure records continued growth and not another dip. The fact is
that the April figure was unsustainably high.
5. Employment Does Not Look Threatening, Either:
Indicators on hours, temporary employment, and even full-time employment
have begun to edge up. And even though the unemployment rate has failed to
fall in a concerted way, such a move would be premature at this stage in the
recovery, at least given the lags averaged in past cycles. Actually, the
jobs market is slightly ahead of schedule, according to these historical
6. Financial Markets Are Healthier Than the Headlines Imply:
Though Europe’s sovereign debt problems present a huge
financial and, consequently, economic risk, financial markets have
nonetheless demonstrated an impressive resilience. Indeed, their behavior
under this strain speaks to a significant, fundamental healing. Contrary to
the tone of the headlines, markets have avoided the much-looked for relapse
into the mess of 2008–2009. For example, the TED spread2
(the gap between Treasury bill and interbank lending
rates, and a good indicator of liquidity) has only widened in this crisis,
from 20 basis points (bps) to about 40 bps. Some widening was to be expected
in the face of European uncertainties, but matters are still a long, long
way from the 460 basis-point spread recorded during the 2008–2009 crisis.
Similarly, junk bond spreads have widened, from some 600 bps over Treasuries
earlier this year, to 700–750 bps, as the European problems have become
evident. Though an unsurprising reaction to the European credit scare, these
spreads are a far cry from the 2,100 bps they reached in 2008–2009.
Meanwhile, issues continue to get sold on bond and money markets, and even
bank lending has shown some tentative signs of flowing again.
7. China Continues to Grow:
A slowdown in China is not only consensus but it also is a
reasonable expectation. A housing bubble of sorts is deflating in China’s
major cities. The government in Beijing has taken monetary and fiscal steps
to slow the pace of growth. Beijing’s recent decision to allow the yuan to
appreciate against the dollar on foreign exchange markets has raised
questions about the future growth of Chinese exports, both to the United
States and to Europe.
But though all these factors are real and will slow China’s
general economic growth rate, it would be a mistake to exaggerate them.
China’s decline in residential real estate prices hardly risks the financial
collapse that occurred in the United States about a year and a half to two
years ago. For one, debt levels in China are much lower than they were or
are here. While Chinese households on average are carrying debt equal to
about 40% of income, American debt levels approach 120–130% of income. For
another, Chinese typically put 50% down for a home purchase and almost never
less than 20%. Neither will the yuan’s increase impact exports very much.
The currency appreciation is so slight and so carefully managed that it is
more cosmetic than real. It is certainly insufficient to threaten Chinese
exports. Broad economic indicators also show a slowdown, not a decline. The
PMI, for instance, dropped from 53.9% in April to 52.1% in May, but still
anything above 50% is expansion. If, as expected, China’s overall growth
slows for an 11.9% annual rate in the first quarter, to 9.5%, it will still
remain faster than the rest of the world—and hardly the stuff of which
double dips are made.
The Purchasing Managers Index (PMI) is a composite index
that is based on five major indicators including: new orders, inventory
levels, production, supplier deliveries, and the employment environment.
Each indicator has a different weight and the data is adjusted for seasonal
The TED spread is the difference between the interest rates on interbank
three-month eurodollar contracts as represented by the London Interbank Offered
Rate (LIBOR) and short-term U.S. government debt (T-bills). TED is an acronym
formed from T-bill and ED, the ticker symbol for the eurodollar futures