STATISTICAL RECOVERY

Some thoughts by David Rosenberg, who always hits on the head.

 

GDP REPORT IN PERSPECTIVE

We won’t deny that we have a statistical recovery on our hands in the U.S. — after all, if the economy was not managing to expand at all with all the massive policy stimulus in the system then that would truly be a disaster. But we ran some simulations and found that netting out the monetary and fiscal stimulus in the system, real GDP growth would have come in at the oh-so-lofty rate of 0.7% annualized in Q1 — versus the posted 3.2% advance. So, one can say the stimulus is working in keeping the economy above water; however, we would say that the recovery thus far lacks the same organic vigour we saw in that failed recovery and risk asset rally in the opening months of 2002.

The question is what happens once the stimulus cupboard is bare. At least heading into 2003 we had a massive credit expansion and huge housing inflation to spur on the economy, even if it was a truncated five-year business cycle. It truly is difficult to assess what sector will carry the baton outside of capital spending but it is barely 10% of GDP. It is tough to believe that exports will carry the day with Europe likely heading back into malaise mode — home to half the foreign profits derived from U.S. corporations. With inventories now having been swung back in line with sales, re-stocking cannot be relied upon to contribute as it has in the past three quarters. Meanwhile, housing, commercial construction and State & local government spending are all likely to remain on their downtrends through year-end and into 2011.

The gig is up. Real final sales, despite all the government’s efforts, have only managed to recover at a 1½% annual rate since the recession supposedly ended last summer. In a typical post-recession bounceback, the rebound is closer to 3½% and with far less intervention out of the Fed, Treasury, White House and Congress.

 

We won’t deny that we have a statistical recovery on our hands in the U.S., but the big question is: what happens once the stimulus cupboard is bare?