Is the Recession Debate Becoming a Moot Point?
Wall Street’s analysts are slashing their Q2 GDP forecasts again this morning following the weaker than expected retail sales report. I know we’re in a balance sheet recession, but with Q2 tracking near 1% growth the whole recession debate is practically becoming a moot point. Goldman describes us at “stall speed” so who’s going to run around bragging about the difference between marginal growth and marginal contraction? The bottom line is, this economy is incredibly weak and the risk, unfortunately is likely to the downside as the fiscal cliff nears. I know I’ve been in the “no recession” camp for several years now (which has been correct), but I’m not exactly breaking out the pom-poms just because we’re growing 1%. Technically, the recession callers are wrong, but we’re practically splitting hairs here saying that….
Here are some updates from around Wall Street:
Goldman Sachs (via Zero Hedge):
1. Retail sales declined by 0.5% (month-over-month) in June, while the consensus had looked for a 0.2% gain. Key details of the report were also weaker: non-auto retail sales declined by 0.4%, and growth in April was revised down. Similarly, “core”/control retail sales (ex-autos, gasoline and building materials) was weak, declining 0.1% in June. The weakness reflected lower sales across a variety of categories, including general merchandise stores, electronics, furniture, sporting goods stores, and health and personal care retailers. Merely food and beverages, clothing, and non-store retailers posted gains on the month. The report was a negative for our tracking estimate of Q2 GDP growth, which we reduced by two tenths to 1.1%.
Deutsche Bank (via Business Insider):
The net effect of weaker than expected retail sales, inclusive of revisions, is less Q2 consumption which we are tracking at +1.3%. This is down from our previous estimate of +1.8% and causes us to lower our forecast of Q2 real GDP by another 0.4% to +1.0%.
Nomura:
According to the Census Bureau, retail sales declined for a third straight month in June, declining by 0.5% following an unrevised decline of 0.2% in May and a downwardly revised decline of 0.5% in April. The weaker-than-expected June data in addition to downward revisions have lowered our Q2 GDP tracking model to 1.2% from 1.3% previously.
HSBC:
Consumer spending slowed abruptly in Q2. Consensus estimates of GDP growth in Q2 are likely to be lowered to 1.5% or less, down from growth of +1.9% in Q1. Pressure on the Fed to provide additional monetary accommodation will increase.
Merrill Lynch (via Calculated Risk):
Today’s weak retail sales report leaves Q2 GDP tracking a meager 1.1%. We expect the economy to remain weak through the rest of the year with growth of only 1.3% in Q3 and 1.0% in Q4. This translates to GDP growth of only 1.3% Q4/Q4, significantly below the Fed’s forecast of 1.9-2.4%.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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17 Comments
Does a recession and/or QE 3 drive mortgage intrest rates even lower?
Does a recession and/or QE 3 drive mortgage intrest rates even lower?
YES. If mortgage rates don’t fall much on their own due to slow growth, then when QE3 kicks in, the Fed will drive them lower. But in November, it’s possible that the fiscal cliff and a ratings downgrade could make them go higher.
Thank you.
People who argue whether we’re in a recession or not have failed to understand the balance sheet recession.
Stall speed is very negative for regional banks…….. wait to short.
Has your algo changed?
Still bullish, but reducing exposure into the run-up….
Excellent time-saving summary of where the US economy stands.
IMO, the entire recession or no recession call is an academic debate for bragging rights for ECRI and Hussman versus the NO recession people. Who cares?
The real issue is what is the potential downside in corporate profits because that is what the stock market is going to react to. I think in 2001-2002 trailing 12 months earnings troughed at $40-$50 and the S&P went to 800. In 2008-2009 earnings went negative…not sure what they troughed at subtracting out the write-offs and the S&P went to 670. We are already seeing earnings warnings and weakness so I’m guessing earnings have peaked for this cycle and we are now on the downslide. Do they bottom at $90 or $80 or $70 or $60?
The debate matters because if you’re in the investment world a 2-3% swing in GDP growth can mean a 40% swing in stocks and other markets. Also just because we are in a long deleveraging phase doesn’t make the distinction between weak growth and recession irrelevant. It just means that the growth will be weaker and not sustainable until the private sector deleverages enough to be weaned off the govt’s fiscal support.
The questions are when will QE3 be done, and what will Bernanke buy? I seriously doubt that he will buy Treasuries, and although he may buy mortgages, I suspect he will buy other stuff as well. Bernanke could buy corporate debt, the debt of the most financially stressed States, and gold. Buying gold in huge quantities would be one way of pumping trillions of dollars straight to the private sector, although most of it would leak out of the USA. If Bernanke buys gold, the operation will probably be coordinated with all other major Central Banks in the world.
I did not get the gold part!
Hey Cullen, do you think maybe this could happen for US Q2 GDP the same way it happened for Australia Q1 GDP? May’s CPI was -0.3% m-o-m, and April was no change. I know the GDP deflator is not the same thing as the CPI, but still … If we get a zero or negative number for CPI tomorrow, it’ll have me, at least, wondering about the possibility.
I thought you said we never got out of the recession, no? You changed your line? What’s your investing record by the way? Not too good I suppose given your track record on what you’ve been talking about.
Did you read the article? I said:
Also, I’ve averaged 17% per year over the last 8 years. No negative years. I’ve got the audited results to prove it. And it’s mainly the result of getting the macro right – the housing bubble, consumer credit, the balance sheet recession, no hyperinflation, deflation/disinflation, QE failing, etc etc. Basically, all the things the mainstream failed to predict.
You must not be a regular reader because I don’t know many people who have nailed the macro picture better than Cullen has over the years.
Cullen- What are your thoughts about how reaching “stall speed” could lead into a negative spiral?
In other words, just the building media coverage and threat of even a single quarter negative growth might create a self-fulfilling prophecy as business and consumer both prepare for the possibility of recession(which in turn reinforces the cycle). Reducing inventory and spending at this juncture would seem most prudent as a corporate leader.
We also have the latter part of 2012. Even though there is a high probability that the “fiscal cliff” is avoided at the 11th hour, businesses will need to plan for the possibility of significant changes. This will also be damaging to growth.