Thursday, August 4, 2011

On mammals and dairy

Journalists and bloggers love to be the first to break a story. They love to have history validate their predictions, and be able to have the satisfaction of citing a story they wrote months ago so that they can sit back in their spinney computer chair, and with a grin, type: “I’ve been saying this all along!” or “Told you so!” So naturally, if today we are seeing beginnings of the second recession in three years, I wanted to have a blog entry writing about it.  But rather than just sounding the alarms based on one day’s slide (which nonetheless quite significant, the DOW is down 300 as I write) it’s important to separate fact from fiction.
FACTS: The market’s reaction to the debt deal recently signed by President, which was predicted to bring calm to the recent choppy waters, has been: so what? The reason for this is probably that it simply postponed the debate in a not so inconspicuous manner. The “super-congress” which must reach an agreement by December faces much of the same challenges which congressional leaders and the president faced in formulating the current deal. While the deal was no doubt necessary to prevent even more catastrophic losses on Wall Street, and to the U.S. economy in general, the deal did nothing to halt the downtrend the markets have been seeing thus far in 2011.
Over the past several weeks, market gains have generally been an exception to the rule. They have come with occasional “better than expected” (usually weekly) reports on manufacturing, consumer spending, etc… but have not been frequent enough to categorize as a trend. The fact is, the trend of the markets in the first and second quarter of 2011 has been a downward one – the NBER classifies a recession as two consecutive quarterly contractions of economic growth; while GDP growth in the second quarter was not negative, it was certainly nothing to be happy about, at 1.3%, driven mainly by increased exports as a result of a weak dollar. For those of you keeping track, with the baby-makin’ capacity of the U.S., that’s not enough to sustain job-growth. In a nutshell: we are well on our way to the dreaded “double-dip”, and when we’re not talking ice-cream, this is cause for fear.
FICTION: The market is a reliable barometer for the state of the macroeconomy.  If the macroconomy is Mayberry, the market is Barney Fife; always entertaining, but often lacking in sound judgment and prone to overreaction and silly yet sitcom-worthy antics. It's good that he's there to keep us on our toes, but we'd never want him at the helm of the Mayberry County Sheriff's Department. It cannot be disputed, though, that long term market trends generally reflect GDP movements (not sure how that fits in the Mayberry metaphor, but worth noting).    
In conclusion, I’m not jumping on the “double-dip” bandwagon because I’m conservative. I’m not jumping on because the markets are sliding in similar proportions as they were when investment banks were collapsing left and right in 2008. I’m not even jumping on because I’m vain, and I want to be among the first to write about it (indeed, the ship has sailed there anyway, because many have been crying about a second recession the day we were reportedly out of the first). I am only becoming worried now because our economy has been in a state of contraction all year, and our government has proved unable to create growth, or pursue policies which give consumers confidence that there will be any growth in the future. The contraction hasn’t been as a result of unpredictable shocks, as many (myself included) believed with the disaster in Japan, and the unrest in the Middle-East; it has been the result of the fundamentals of our economy being weak, and Americans having no reason to believe a change for the better is on the way.
I’m not even writing this post to claim we are on the brink of a double dip recession, but I do believe we’re at the point where the economic data show that it’s rational to think so. At the end of the day, I don’t think it’s debatable that a huge number of Americans feel this way, and are at the very best going to stick their heads in the sand and sit on the their investments to weather this storm over the rest of the year – a scary proposition for the job market. What does this mean? Someone in the White House has some serious ‘splainin to do over the next several months, and dare-I-say, in November of 2012.