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Citi: What Falling Leading Indicators Are Really Saying Right Now

If a double dip recession were truly coming, whereby GDP falls during an upcoming quarter, we'd be seeing far worse economic data than we currently are, says Citi's Steven Wieting.

While rebounding economic indicators have begun to lose steam, it's all part of an expected second half 2010 slowing of growth rather than an aborted U.S. economic rebound. Citi, and most forecasters, never expected US GDP growth to maintain the initial speed it achieved coming out of the recent crisis.

Citi:

The message of leading indicators is fairly straight forward: Growth in the second half 2010 is poised to slow, helped along by tax and regulatory uncertainty and unintended effects of expiring tax subsidies in housing. To whatever extent this results in tightening financial conditions, it could further fade expansion prospects and leave forecasts for 2011 particularly uncertain.

But evidence of a new outright contraction is sorely lacking. Cyclical business activity is low and rising. Long leading indicators suggest little risk, while very short-term leading indicators seem swayed by a modest correction in commodity prices after a stunning rebound. This may have little to do in fact with broad U.S. activity.

Some of the events of the past few years have provided unique unexpected outcomes that can’t fit neatly into business cycle analysis. But the probability of new contraction without sequenced evidence should still be judged as low.

Here's one sample chart shown in Citi's report:

For one, we would expect broad financial conditions to be deteriorating far more significantly than we have to date. Credit spreads have widened slightly and equities have more than erased gains for the year-to-date period. However, the weakening to date – for which we wouldn’t solely indict or absolve Europe – has not exceeded the scope we would expect beyond a mere growth deceleration in the coming months (see figure 1).

Chart

And another:

As figure 9 shows, a so-called probit model that includes both private financial conditions and the yield curve and estimates recession probabilities over a one-year period ahead is at a level implying exceptionally low recession risk.

Chart

Also, see how the New York Fed Sees Zero Chance Of A Double Dip'

(Citi, What Leading Indicators are Really Saying, Steven Wieting, 28 June 2010)



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