It wouldn’t be accurate to say that David Rosenberg is piling into the double dip camp. He’s essentially been in the permanent dip camp for the last few years. But are we looking at a garden variety recession or are we looking at a depression, like Paul Krugman thinks?
Rosenberg doesn’t seem to care so much. All he knows is that the market is braced for strong second half growth and that’s unlikely to materialize. This market is reminding him of 2002, a year that wasn’t actually classified as a double dip, but was notoriously heart breaking for investors who bought into the recovery theme:
While the ECRI “spot” index did bounce back last week for the first time since the week of April 30th, to 122.92 from 122.43, the damage has already been done as the growth rate slid further into negative terrain, to -6.9% from -5.8% last week and -3.7% the week before that.
The reversal from +21.2% at the turn of the year is stunning, not to mention unprecedented. When it first hit this level back in December 2007, the recession was already beginning. When it hit -6.9% in December 2000, the recession was only three months away – surprising a befuddled consensus economic forecast that only called for a “soft patch.”
Back in 1990, it first attained this level in October when the recession was already three months old! We ran some logit models and found that ‘double dip’ odds are now up to 48%. This compares to 5% in May and near zero at the turn of the year. Going back to when the data began in 1970, once this model breaks above 50%, recession ensues every time. The economics consensus has the blinders on as it did in the final few months of 2007.
While it is true that the ECRI smoothed index (the growth rate) has only sent off one head-fake historically, back in 1987, when it reached -6.9%, the reality is that a recession only becomes a sure thing at -10 or worse. For now, the ECRI is predicting a slowing in real GDP growth, to 0.8% at an annual rate in the second half of the year, right where real final sales growth was in Q1. For a market braced for 3% second-half growth, a sub 1% trend will end up feeling like a recession, as was the case back in 2002, which posted a relapse in growth but was never classified as a double-dip. Considering that the stock market took a huge nosedive but did not bottom until October of that year, there was little distinction made between “growth relapse” and “double dip.” Only the economics community engaged in that debate.
Source: Gluskin Sheff