I have to admit that the news flow certainly hasn’t improved in recent weeks. While domestic economic data remains somewhat strong it’s impossible to notice that the world around us appears to be increasingly unstable. My two chief foreign concerns in 2011 were China and Europe. The economic situations in both regions are tenuous at best. Nonetheless, I still think you have to view the 2008 recession as one long recession as opposed to falling for the idea that we recovered and are now at risk of relapse into new recession.
As I’ve long stated, the balance sheet recession never ended. All that happened was that the government came in and papered it over with massive deficit spending. To predict new recession is to misunderstand the macro dynamics at work here. The key remains government spending and understanding the exogenous risks. In a fragile economy like ours where the consumer continues to de-leverage, we have to be increasingly aware of what could tip us from mild growth into severe downturn. The obvious risk is austerity which has exposed the true depth of the balance sheet recession in many European countries (something we predicted would occur in both the UK and Europe).
But many prominent economists don’t agree with this general macro notion and I can’t say that I don’t take their opinions to heart. After all, I am largely alone in a camp that is essentially saying “it’s different this time” – certainly not something I feel comfortable with. Among those calling for renewed recession is John Hussman whose opinion is always worth taking into consideration. In this week’s missive he continues to build the case for his recession call:
To extend the evidence beyond our own measures and ECRI’s analysis, the chart below presents data (through October) from the Organization for Economic Cooperation and Development, an international quasi-governmental agency that sets international standards on a wide range of economic policy issues. The OECD publishes its own set of leading economic indicators on developed and developing countries. Notably, we’ve never observed deterioration to the extent that we presently observe, except when the U.S. was in or entering a recession.
Now, I clearly don’t agree with the idea of renewed recession, but the risks are certainly rising. The rhetoric out of Washington is particularly alarming with the payroll tax cut now looking at risk of not passing or being extended for only a brief period. That’s an estimated 0.75% off of Q1 GDP. Whatever happened to Republicans loving tax cuts? I guess they’re more concerned with our mythical insolvency that is right around the corner as Congressman Boehner reminds us today that the payroll tax cut needs to be “financed”. Oye.
Either way we can expect the tough slog to continue. In Hussman’s case the slog turns into a stall. I still don’t think that’s where we’re headed courtesy of 10% budget deficits, but you’d be a fool not to acknowledge the risk and invest accordingly….