U.S. Slip-sliding into Recession

Economics / Double Dip Recession
Apr 16, 2011 - 12:47 PM

By: Mike_Whitney

In June, the Fed's bond buying binge (QE2) will end and the economy will have to muddle through on its own. And, that's going to be tough-sledding, because QE2 provided a $600 billion drip-feed to ailing markets which helped to lift the S&P 500 12% from the time the program kicked off in November 2010. Absent the additional monetary easing, the big banks and brokerages will have to rely on low interest rates alone while facing a chilly investment climate where belt-tightening and hairshirts are all-the-rage and where consumers are still licking their wounds from the Great Recession. None of this bodes well for the markets or for the millions of jobless workers who continue to fall off the unemployment rolls only to find that the social safety net has been sold to pay off the mushrooming budget deficits.

So, what are the odds that the economy will tumble back into recession?

First, let's look at the stock market and an article by Marketwatch's Mark Hulbert:

"There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines....

The four previous occasions over the last 100 years that saw the CAPE as high as they are now:

The late 1920s, right before the 1929 stock market crash

The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms

The late 1990s, just prior to the popping of the internet bubble

The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch

To be sure, a conclusion based on a sample containing just four events cannot be conclusive from a statistical point of view. Still, it will be hard to argue that the current stock market is undervalued or even fairly valued...." ("History bodes ill for stock market," Mark Hulbert, Marketwatch)

Well, that doesn't sound too good, does it? The markets appear to be at a tipping point while consumers are still deleveraging to get out of the red. But at least another credit expansion is underway, right? Isn't that what Bernanke just said two weeks ago? That's should keep the economic-flywheel spinning-along until consumer demand picks up, right?

Ahhh, if it was only true. But, it's not. There is no credit expansion; it's just more public relations fluff like "green shoots" and "self sustaining recovery". Here's a blurp from Gluskin Sheff's chief economist David Rosenberg who breaks down in the credit picture in plain English:

"Consider this: We know that consumer credit, ex-student loans, is still contracting. And we know from National Federation of Independent Business that "the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing."...

And this---also from The Big Picture blogsite:

"The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth - as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.

I respectfully beg to differ. While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed." ("Fade the Consumer Credit Headline", The Big Picture)

Sure, student loans and subprime auto loans have been surging, but that's mainly due to crafty sales-hype and government subsidies rather than real organic demand. The truth is, consumers are still hunkered down and adding to their savings. They're shunning additional debt regardless of low rates and other inducements. So demand is still weak and getting weaker as food and energy prices soar. And, while its true that core inflation is still hovering around 1%, headline inflation has zoomed to 0.5% in the last month alone. What does it mean? It means that the average working slob can't buy Mom that new waffle-iron because he shot the wad filling his behemoth SUV with CITCO unleaded.

It's the same for retail sales, which increased by a whopping 0.4% in March. Only, don't drill too far into the numbers or you'll find the truth, that apres gasoline, the number drops to a paltry 0.1%, hardly worth mentioning. So, times are tough for consumers and they're about to get a lot tougher as the GOP-led Congress takes its meatcleaver to the 2012 budget and the states are forced to dump payrolls and slash services to the poor and needy. It's all bad.

Is it any wonder why small business owners are so dejected and don't see a glimmer of light anywhere? Check out this article from the Wall Street Journal:

Small business owners became more worried about the economy in March, according to data released Tuesday....The National Federation of Independent Business‘s small-business optimism index fell 2.6 points to 91.9 in March....

Despite worries about future demand, small business owners plan to increase their selling prices. The report said the seasonally adjusted net percentage of owners reporting higher selling prices increased to 9% in March, from 5% in February. The reading has risen 20 percentage points since last September, the report said.

The NFIB said a major force behind the price increases is the elimination of excess inventories. The report also said profits are “badly in need of some price support.â€