Double Dip Recession
By Neville Bennett
New York based FX Concepts forecasts the US entering a further recession and a “double-dip” in the coming year. Double dip apparently refers to the Dow plunging from its current 8400 to 6000 and the USD/EUR depreciating by about 15% to $1.10.
The double tip concept has also emerged in the analysis of Stephen Roach, chief economist of Morgan Stanley. Roach observes that US growth rates have been revised downwards, and contends that the economy is now at stall speed. He warns that another shock will “trigger the double dip”. The shock may emerge from corporate collapse, corporate cost cutting, a credit crunch, a downturn in housing, or another geopolitical shock.
Roach believes demand always relapses when business in recovering from recession. Double dips “are the rule” past business cycles and the likelihood of another soon is 60-65%. This will have “actionable implications for stocks, bonds and currencies.”
While not actually defining a double dip, Roach implies a fall in both economic growth and in asset prices. FX emphasizes stock and currencies. The emphases are different, but these asset classes are linked. When the Dow falls the dollar usually does too. The Dow contracts on news of faltering growth. These analysts predict very tough times ahead with further falls in the stock, and currency, markets. Growth will be lower than expected.
The economy is a primary cause of concern. As was discussed somewhat prophetically in NBR, US GDP figures are often revised. Politicians demand good news, but the economists responsible for this task have a deserved reputation for integrity. The latest revisions cover three years, and have revised growth estimates downward for 5 quarters after the second quarter of 2000.
What had seemed a period of slow growth is now officially a recession over three consecutive quarters. The margin between peak and trough was only 0.6%. Business capital spending fell by $88 billion. This fall was greater than the loss of GDP, so the recession was obviously offset by the resilience of the housing market (NBR) and spending on consumer durables such as autos.
It is now clear that the tech-wreck wrought much destruction. The collapse of the bubble accounted for 70% of the fall in capital spending, and 100% of the fall in GDP. Most commentators picked a growth rate of 3.5% for this quarter, but they were too optimistic. The economy is actually near a stall speed of 1.1%.
There are numerous risks. Shocks could emanate from plunging markets, politics, corporate malfeasance, and foreign events. More probably, there will be further statistical revisions of the current account deficit. A downward revision will slow capital inflows and put downward pressure on the dollar. Savings data is troublesome. The present rate is 4%, well below the trend of 8.6% for 1950-94. Capital investment is very low. Debt levels are undoubtedly excessive. Us household debt is 76% of GDP and business debt is 68% of GDP. These percentages will rise as GDP has been revised downwards.
Many observers agree with President Bush that the US has been partying. There are excesses in consumption, borrowing and speculating. Most observers would agree that there is a price to pay, and growth cannot resume until the excesses are purged and assets brought to realistic levels.
Wall Street has been derailed by a realization that the economic recovery has faltered. The NASDAQ posted losses in 16 of the last 20 weeks. GDP revisions were confirmed by disappointing employment data.
The diminishing recovery affects upon business profit expectations. On the other hand, business might expect a lift from falling interest rates, which lower its costs. Bond yields are trending down and the December Futures Contract indicates 1.5% overnight interest rates. The market firmly anticipates Greenspan lowering by another 25 points.
Falling interest rates are unlikely in themselves to counter other negative pressures. The Institute of Supply Management (ISM) index of manufacturing sank to 50.55 in July from 56.2% in June. New Orders fell very sharply from 60.8% to 50.4%; employment fell 49.75 to 45%. Wall Street plunged on the release of these figures: it was as if an engine had dropped off.
The data suggests the bear market is not over. FX Concepts makes the historically valid point that “bottoms are made when sellers have finished their selling and when buyers are too discouraged to buy anymore”. Moreover, while the bottom is forming, people do not “even want to discuss the market.” This seems a valid observation of New Zealand after the 1987 crash. The share clubs vanished. The people who got burned have barely returned to the market.
Wall Street will fall further. Falling equities will cause the depreciation of the USD. The dollar has been strong in part because of its competitive long-term interest rates. The interest rate curve was steep; with low short rates but high rates for 10 –30 year bonds. Investor flight from equities to bonds has forced long term rates down. The curve is flatter. The US curve has lost its margin over the Euro. Given fears of a contracting economy, the USD has declined in value. Thus, the US is caught in a bind, almost a triple dip in its economy, stock markets, and currency.
Neville Bennett: Phone (03), 3482233
Email n.bennett@hist.canterbury.ac.nz |
