U.S. Economy: 'Less Bad' Doesn't Mean 'Getting Better'

Have you ever had a relative or pets in the hospital with a serious illness? Initially it looks like the situation is dire and then for whatever reason the rapid descent they were in seems to relent? Has a doctor in that situation ever told you "they are getting better"? Me neither..

Thus is the current economic condition. After successive -6% quarterly GDP figures, estimates are for -2% to -4% in Q2. This is being taken by some to mean the economy is "getting better". No, it isn't. It just is not "worsening as fast". Q1 GDP of -6.1% means it was 6.1% worse than Q4 2008. A drop of anything in Q2 means Q2 was worse than Q1 and the decline continues. Any negative number means the economy is still contracting (worsening). Measuring it isn't like earnings that are compared for like periods year to year. GDP is a rolling, continuous number.

Think about it like this. It is like having three heart attacks today and only two tomorrow, would the doctor call that "getting better"? Of course not. You are still sick and there is still a very large problem.

Now there are those who will say I see the glass half empty. My retort would be that the glass has a leak, just because the water is leaking out more slowly, does not mean it is filling up (in the analogy the leaking is the contracting economy and the filling up is growth). The half empty argument is one to be had when we approach 0% GDP or only marginally negative.

What is more likely in my opinion is that we are approaching a period of prolonged economic malaise. Very little if any growth, and this is important, from already severely reduced levels. While sitting here is better than a continued decline, I'm not sure it warrants the single best two months' performance in the history of the US stock market.

Put in perspective, 40% of this market run up has been due to the performance of financial stocks. These are companies that without Federal aid or adjusted accounting rules would have reported far different results. That does not qualify for "getting better" in my book.

Now, I hope I am wrong. I am not "short" (although I own a tiny bit of SH to take the bite out of any large decline) and talking my book. I am just giving reasons why I am more hesitant than most to put fresh money to work in anything other than commodities or deep value stuff.

Are there some positive signs out there? Sure. I would counter that after the free fall we had at the end of 2008, any economic activity is wonderful news. That still does not equate to "recovery". I think we may need to get used to the fact that we may be entering a period of a "new normal". Whether that is good or bad is another debate, I think it may be inevitable.

With that being said, I'm not sure the market recognizes that yet...

Disclosure ("none" means no position):none

Comments

[User 180638:]

Concur. May be half of the population has no idea that the decreasing rate of decrease means the economy is still on the downward sloping curve. Then there will be a period of inflection....before the curve goes up. April 2008, Standard & Poor wrote that the analysts had in sight end of housing problems. Rally, rally...I was short on YGE, JASO &.....in the midst $20s, they went up to 30s. Then there was a free fall, they dropped to less than $4....

To create a rally is for those big guys to make money. So turn off the noise of the big months and stick to the real numbers.

May 03 09:22 AM

[Owen B:]

Thanks for this. For an alternate read that isn't based on Wall Street salesmanship, read the ECRI post on their homepage businesscycle.com, especially the part about 'error of pessimism."

May 03 09:23 AM

[Pcatlow:]

Interesting read. Now, the question is this:

1. Does the market CAPTURE forward data and reflect that reality in current market levels (S&P, Averages, etc/) ---or---

2. Is this market reflecting current data and adjusting itself accordingly.

What I am getting at is this: IF it is true that the market prices the future, then they already know, and have priced the equities side of our market based on post 4th quarter "forecasts." BUT, what does the market believe it sees in 2010, 2011 and beyond.

In effect, my take is that we truly have made a paradigm shift and the small retail investor is so spooked now that they will never trust the markets again in their lives, are hiding in cash and fixed investments and the large commercial traders have no one but themselves to feed upon.

The market is doomed from that perspective. I am a baby boomer in my mid-50's and will sit aside, trade futures and move my money into cash instruments as a way to hedge against a falling dollar. I will not re-enter the market until (if) the regulators punish those who lie...and that ain't happening, folks.

May 03 09:51 AM

[Buy and Hol...:]

Very well put. And for all the talk of "green shoots" and "daffodils" out there, consider this.

What's going on with jobs?

We're continuing to see over 600K people file for unemployment for the first time each week. That is 600K people who are likely going to be unable to pay their credit card bills and mortgages.

This problem is going to undercut any recovery and if someone sees daffodils, they better take pictures of them. There is going to be a late season snowstorm that kills all the daffodils and it's called credit card defaults.

The permabulls just don't seem to have a grip on reality. Someone did get it right, though. And she's saying credit card defaults are going to be a huge problem.

online.wsj.com/article...

It might be a good idea, when listening to pundits, to see what their track record is. We should give more credit (no pun intended) to people like Whitney and Roubini, who got it right and a whole hell of a lot less credit to people like Laffer and Kudlow, who have been dead wrong.

May 03 10:21 AM

[InvestBaboo:]

So this article is sort of like a watercooler for all the PermaBears on SeekingAlpha to come and enjoy each other's misery what with the markets defying all this extraordinary bear wisdom! If history is any indication you folks will be the signal that the bull market has ended because when you jump in it will be time to quit. Again I am baffled why it is that you just won't ride the market trend until it is no more (encounters a bend!) rather than stand on the sidelines and walow in misery as your bank accoungts stay stagnant and the bulls are laughing all the way to the bank!

May 03 11:27 AM

[nukldrager:]

How anyone can stand to hear financial entertainers shout, scream, rant, interrupt their guests day in and day out is beyond me.
But to each his own. Less bad, or getting better is more white noise. Globalization, systemic corruption, capital stock finding efficiency and balance. Pass the Soma.

May 03 12:18 PM

[nukldrager:]

Touche' lol


On May 03 11:27 AM InvestBaboo wrote:

> So this article is sort of like a watercooler for all the PermaBears
> on SeekingAlpha to come and enjoy each other's misery what with the
> markets defying all this extraordinary bear wisdom! If history is
> any indication you folks will be the signal that the bull market
> has ended because when you jump in it will be time to quit. Again
> I am baffled why it is that you just won't ride the market trend
> until it is no more (encounters a bend!) rather than stand on the
> sidelines and walow in misery as your bank accoungts stay stagnant
> and the bulls are laughing all the way to the bank!

May 03 12:30 PM

[Edward Ulys...:]

Perhaps we're just in the eye of the "financial hurricane," as agent Buffett is calling it now. Never was in a hurricane until I was in Houston back when Alicia hit. Storm seemed over, sun was shining, birds flying around, not many threatening clouds; so I got in my car and headed to my client's office. Two miles down the road, my car started rocking from the side wind. Immediately did a U-turn and all was calm again. Sped back to the hotel and just as I got out of the car, the strong wind came again. Real stupid of me. A mistake I won't repeat, not even economically.

May 03 12:46 PM

[Alphameister:]

Owen B.

Thanks for the link to the ECRI analysis, the most persuasive single analysis of the economic outlook I've encountered . Many comments display no understanding of the leading versus lagging nature of various economic indicators. Whitney and Roubini deserve kudos for their anticipation of the crisis, but I sense they have become so intellectually and emotionally invested in the negative views that have brought them so much fame that they are resistant to accepting the message from ECRI (which called the downturn just as well as those two talking heads).

May 03 01:08 PM

[Market Sniper:]

All depends on what time frame your trading. As a day trader, I have no directional bias. I just trade what I see. Been a rally of historical proportions, no doubt about that! But so far, it is a rally within a bear market. As for the longer term trend, we still have lower highs. Until we surpass the February highs, then the January highs as well as the election highs, that will remain the case.

May 03 01:10 PM

[rockingandr...:]

I agree with your assessment on our current situation.

The "new normal" may become stagflation, or some such combination that will keep our economy in the doldrums....It reminds me of possibly revisting the Jimmy Carter period - or worse....if you can invision that!

The current plan for increased and continued inefficient government spending will be the real ball and chain around the ankle of recovery. The current programs as devised will inhibit private sector job creation and this doesn't bode well for a long bull run. I think the current optimisim surrounding the government bail out (with taxpayer money) is currently driving this market up. For how long....Ride the wave now...but be ready to jump off the surf board when the wave stops.....

May 03 01:40 PM

[BerkeleyBob:]

I wonder where the notion that the "market" is a predictive tool for general economic conditions a year or two or three out came from. Although an individual stock's price may have future good or bad news "baked in" to its current price, the conventional paradigm is a near obsessive focus on short term outcomes, quarterly earnings predictions, etc. etc. This is complicated by the fact that we do not have a good mechanism for tracking externalization of future costs. What is the full (societal, environmental) cost of operating coal extraction by removing mountains and imposing the tailings on adjacent and (lower) properties? What is the full cost (envirnomental and otherwise) of encouraging nuclear power without an acceptable means of disposal of waste? Other examples will readily come to mind...

May 03 04:30 PM

[@TexasER:]

Anyone who thinks the market is a good predictive tool should rethink the S&P chart for the last year.

May 03 05:41 PM

[InvestBaboo:]

Go ahead and disagree with me (the bull) but empty words aside here is what I have standing on my side.

CHARTS! CHARTS! CHARTS!

NASDAQ celebrated its 6th consecutive weekly buy on the charts. Go back and look when is the last time this happened and with each week a reversal becomes less and less likely.

S&P which was a buy on daily charts for several days accomplished its first weekly buy just this past week. Dow is about to tip over and it too will follow.

Leading stocks in leading industries are all Buys on daily and now many on weekly charts.

The bend has not arrived to the trend, my friends. It would be wiser for you to get on the train and enjoy the ride. Please trust that I will tell you when I spot the bend so that we can all get off the train gracefully and allow the late riders (AKA bagholdres) to take our positions.

May 03 06:17 PM

[Buy and Hol...:]

Who says you can't think this is not the end and still play it if it's a bear market rally?

Just use trailing stops, which you should be using anyway.

I look at this like the rally that we saw towards the end of last year. People were saying, okay, so that was the low and the bear is dead. Well, it wasn't, but you could have ridden C from about four bucks a share to around eight and sold it around seven and got a nice pop.


On May 03 11:27 AM InvestBaboo wrote:

> So this article is sort of like a watercooler for all the PermaBears
> on SeekingAlpha to come and enjoy each other's misery what with the
> markets defying all this extraordinary bear wisdom! If history is
> any indication you folks will be the signal that the bull market
> has ended because when you jump in it will be time to quit. Again
> I am baffled why it is that you just won't ride the market trend
> until it is no more (encounters a bend!) rather than stand on the
> sidelines and walow in misery as your bank accoungts stay stagnant
> and the bulls are laughing all the way to the bank!

May 03 09:11 PM

[Buy and Hol...:]

Who is predicting next quarter's GDP will be positive?

I've been reading the pundits say that if the stimulus kicks in, next quarter's GDP will SHRINK at about half the rate as the last quarter.

The IMF is predicting a global contraction for the year.

So, again, who is saying the next quarter's GDP will be positive?

On May 03 01:27 PM Cetin Hakimoglu wrote:

> But 'less bad' typically precedes 'better' and double dip recessions
> are rare. Given recent strong economic data the next quarter GDP
> is expected to be positive.

May 03 09:16 PM

[nukldrager:]

Somebody WAKEUP kinda grouchy today?

May 03 09:47 PM

[spadice:]

The central problem is greed unlimited.
- Everybody a mortgageloan (commission bankers etc.);
- Toxic products distribute to financial institutions (as solution);
- Jupiter-bonuses;
- Unprecedented ransoms;
These causes must be solved and can't be solved with impunity. Revision of the financial system as well as comprehensive internal control systems should be the foundations in the near future.
However don't make the mistake to magnify the problem.
The central problem is greed unlimited instead of a number of crisis. Crisis are the causal relations.
Components of the US manufacturing ISM report improved materially in the month of April and that is the moment to buy shares. Buy low and sell high. Ofcourse you are free to trade contrary.

May 04 08:54 AM