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TRENDLines Recession Indicator Sees No USA GDP Contractions Over 5-yr Horizon

click to enlarge ... more macro economic charts @ my SA Instablog & website

TRI USA GDP Targets (2011/10/28)

2011Q3 2.4 %
2011Q4 2.1 %
2012Q1 1.3 %
2012Q2 1.1 % (low)
2012Q3 1.5 %
2012Q4 1.7 %
2013Q1 1.8 %
2013Q2 1.8 %
2013Q3 2.3 %
2013Q4 2.6 %
2014Q1 2.7 %
2014Q2 2.7 %
2014Q3 3.6 %
2014Q4 4.0 % (high)
- -
2017Q4 end of cycle

Jan 28 2012 delayed public release of Oct 28th MemberVenue guidance ~ September saw the American economy finally surpass its Dec-2007 Real GDP high water mark. However, the TRENDLines Recession Indicator projects the weakness of the Recovery will be replaced by an even slower Expansion of the new business cycle on the short term. The October Real GDP growth rate is gauged at 2.2%, down from 2.4% in September. Yesterday, BEA announced its first estimate for Q3 (Sept) @ 2.5% (vs 2.4% TRI).

TRI's fuzzy horizon extends thru a full business cycle. It is presently forecasting 1.8% GDP for November, 2.1% in Q4 & 1.3% by 2012Q1. Today's outlook upgrades Q4 slightly, reflecting the easing of this Spring's high petroleum prices on the especially vulnerable auto sector. However, the effects of cumulative fossil fuel price increases are still permeating thru the economy. As such, the growth rate will worsen and trough @ 0.5% in Feb-2012. Under the present toxic political environment, TRI projects a crest to this cycle of only 4.0% in 2014Q4. The model forecasts 5-yr mortgage rates shall rise 2.0% as the business cycle attains maximum momentum in 2015. Monetary Policy actions by the Federal Reserve & the Treasury Secretary's guidance to Congress with respect to Fiscal Policy will ultimately determine whether the current cycle's bottom in 2017Q4 will be a hard or soft landing, but at this time the latter is indicated.

Political Paradox ~ Past charting reveals a distinct profile has been developing since Nov-2010 within our medium-term outlook and I would have been remiss in not speculating over past months that both commerce & consumers appear to be in a holding pattern in anticipation of an unfolding of the demise of Barack Hussein Obama. Fate has dealt America's celebrity President a difficult hand considering his lack of executive experience and economic knowledge. Mismanagement by Congress & the previous Administration present Obama with a paradox: action is demanded but any attempt may induce unintended consequences.

The circumstances of a Balance Sheet Recession required massive targeted fiscal stimulus best aimed at infrastructure since families and business are mostly deleveraging. Tax cuts & payroll deduction mostly just contributed to a renewed savings mode. Record low interest rates don't help when borrowing demand evaporates. Unfortunately, failure by Washington to prudently raise taxes to accompany record spending since the 2001 Recession has left the Federal Gov't with little leeway for further injections after their 2009 strategic fiscal stimulus errors. "Shovel-ready projects weren't so shovel-ready." Back in mid-2008, Hillary Clinton warned of the inappropriateness of on-the-job-training for the nation's top job. Current Debt/GDP & Deficit/GDP ratios are 98% & 9% respectively. Whether one contemplates further borrowing or quantitative easing (QE3), the cost will be further USDollar devaluation (down 15% since inauguration day), subsequent imported Inflation and more downgrades of the US's federal debt. Conversely, status quo prolongs the 16.2% Real Unemployment Rate.

Headwinds ~ TRENDLines estimates the cumulative effect of several quarters of high petroleum costs reduced October's GDP growth rate by o.6% ... and surpassed this factor's record dampening set back in Oct-2008. Upon breaching $90/barrel, Crude Price passed a definitive Petroleum/GDP ratio which has a history (1980/1990/2007) of inducing a collapse of Light Vehicle Sales (see my Gas Pump model). The present episode began in early February (@ $3.26/gallon) and was responsible for sales retreating to a 11.5-million units/yr pace in June from $13.2 mu/yr in February. It is unlikely auto manufacturing will pass the 14-mu/yr pace 'til Crude Price gets back below $90/barrel. In the good news dept, the Barrel Meter model is currently predicting Crude Price to enjoy a brief flirtation with $72/barrel in May 2012.

USDollar ~ Ironically, the triple-digit crude prices were for the most part the USA's own making. In the realm of unintended consequences, a plethora of avoidable events has thoroughly disappointed the international investment community over the years. There was the aforementioned refusal by successive Congresses to address the long-term structural deficits; the Dec-2010 extension of the Bush-era Tax Cuts; the Obama Administration's decision to unveil the record 2012 $1.5 trillion Deficit Budget (9.7% of GDP); and the inability to pass the 2011 Budget on a timely basis as well and the related threatened Gov't shutdown in April.

If not enuf, the looming National Debt (as illustrated by our Debt Wall presentation) was given widespread media scrutiny via the required debt limit increase. The Debt Ceiling review by Congress forms part of the USA's checks & balances to deal with Budgets that fail to meet reality or Administrations that choose to operate via continuing resolutions and appropriations in lieu of the conventional Budget process. This string of fiscal management episodes has caused a resumption of the secular decline of the USDollar ... down 15% in the last 30 months despite the general EURO malaise.

This debasement commenced in January 2002, was truncated by the safe haven activities in 2008, but the latest resurgence is today responsible for a $17/barrel component of USA's avg contract price of crude oil ($97 in Sept). This factor was a mere $1 on the day of Barack Hussein Obama's inauguration. On the bright side, the secular decline of the Dollar led to a resurgence in May 2011 of new records for Exported goods.

Unemployment Rate ~ The present trajectory should yield an Unemployment Rate of 8.7% by Election Day.

Debt Rating ~ The USA's AAA sovereign bond rating was rightfully cut by Egan-Jones in July (S&P in Aug). Germany, Canada, Australia, Switzerland, Brazil and others have long had better fundamentals. Assuming extension of the Bush-era tax cuts and failing mitigation of scheduled Deficits, the Debt Meter projects USA sovereign debt will be downgraded to a "B" rating upon re-attaining a 3.1% Deficit/GDP ratio. Similarly, a potential Treasuries Crisis will ensue upon assessment of a "C" rating on 10yr/30yr instruments in latter 2022 upon the Debt/GDP re-attaining a 90% Debt/GDP ratio. For some context on the Tea-Party inspired conditions to raise the Debt Ceiling, a $2 trillion expenditure cutback still results in the Federal Debt rising to $21 trillion in 2021 (from $15 trillion today).

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