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TRI-USA says GDP will rise to 1.6% by Election

Apr 27 2012 delayed FreeVenue public release of Jan 27th MemberVenue guidance ~ The American economic recovery finally surpassed the Dec/2007 Real GDP high water mark in October.  Acknowledging the present stubborn weakness won't trough 'til mid-Spring, today's general upgrade of 2012 by the TRENDLines Recession Indicator reveals the expansion of the new business cycle is exhibiting critical mass despite a virtual absence of both fiscal policy stimulus and monetary policy quantitative easing.  The January RGDP growth rate is gauged at 2.5%, down from 4.1% in December (Q4).  Today, BEA released its first estimate of 2.8% for Q4.

TRI's uniqueness is its use of proprietary heuristic algorithms to transform 14 leading data sets into an insightful GDP baseline thru to 2035.  The uniqueness of its methodology minimizes false-positives & false-negatives.  Albeit the past would suggest the demise of the typical 8.5-year business cycle in 2017, the unveiling of today's forecast projects current headwinds will result in a diminished 1.0% RGDP pace for March (Q1), a o.8% trough in April, followed by a surge to 2.7% in Q3 (to be announced mere days prior to the Nov 6th Election) ... en route to a 2.9% growth momentum crest in October.  At that juncture, the TRI long-term chart illustrates GDP commences a secular decline ending with an ultimate hard-landing in 2031, but no sign of resurrection within the 2035 fuzzy horizon.  The trajectory will change, no doubt, as inflation and inventory factors come into play.

Today's 2012H2 upgrade reflects a forecast easing of high petroleum prices upon resolution Iran-related geopolitical issues.  In the short-term however, the same demand destruction that befell the USA auto sector in Spring 2011 is likely to re-emerge in the coming weeks.  The negative effects of cumulative fossil fuel price increases are still permeating throughout the economy.  The diminished crest compared to previous cycles reflects both the ongoing winding down of the balance sheet recession and a toxic political environment at the federal and state levels.  The model warns the housing sector will face a 2% rise in 5-yr mortgage rates in late 2014.  Monetary Policy actions by the Federal Reserve & the Treasury Secretary's guidance to Congress with respect to Fiscal Policy will ultimately determine the timing and harshness of the cycle bottom.

Headwinds - Factors contributing to short/medium term weakness of the TRI outlook continue to be:  (a) stubbornly high unemployment;  (b) political dysfunction;  & (c) cumulative high petroleum costs

Unemployment ~ Plain & simple, the USA has 6 million souls on the sidelines.  And many more millions considering forced part-timers, the underemployed and discouraged workers who have left the labour force.  At 15.2% in December, the Real Unemployment Rate (U-6) is not yet even one-third the way back to its pre-recession 2007 low of 8.0% after rocketing to a 17.2% peak in Oct/2009.

Political Dysfunction ~ Whether viewing GDP or TRI, the economy has been on a secular downtrend since May 2010.  And past charting reveals a distinct profile has been developing since Nov/2010 within TRI's medium-term outlook and I would have been remiss for not speculating over past months that both commerce & consumers appear to be in a holding pattern anticipating the demise of Barack Hussein Obama.  Fate has dealt America's first celebrity President a difficult hand particularly considering his lack of executive experience and economic wisdom.  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 many families and businesses were/are deleveraging.  Tax cuts & payroll deduction holidays mostly contributed to a renewed savings mode.  Lowering interest rates has diminished returns when borrowing demand was evaporating.  Unfortunately, failure by Washington to prudently raise taxes to accompany record spending after the 2001 Recession 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.  The Debt/GDP & Deficit/GDP ratios were 97% & 9% respectively in 2011.  Whether one contemplates further borrowing or quantitative easing (QE3), a critical cost is continued USDollar devaluation (down 20% since inauguration day) and subsequent imported Inflation.  Similar fiscal mismanagement prevails at the State level.

High Petroleum Costs ~ TRENDLines estimates the cumulative effect of many quarters of high petroleum costs reduced December's RGDP growth rate by 1.0%.  The post-Y2k high mark for this metric had been Oct/2008, but was surpassed in Oct/2011 - with new records in Nov & Dec.  Upon breaching $3.37/gal this month, USA all-grades gasoline has once again exceeded a definitive petroleum/GDP ratio with a history (1980/1990/2007/2011) of inducing the collapse of Light Vehicle Sales (see my Gas Pump model) via buyer resistance to seemingly excessive gasoline & diesel costs.

The last episode began in early Feb/2011 (@ $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.  Through most of 2011 it has been my stalwart position domestic auto sales will not exceed the 14-mu/yr pace again 'til gasoline retreated below the Light Vehicle Sales Barrier.  This occurred on queue, but Iran-related geopolitical issues have sent prices skyward and the auto sector faces another downturn in the coming weeks and months unless gasoline recedes below $3.40/gal.

If there is any good news ahead, it is that the Barrel Meter model is predicting improving fundamentals to cause USA contract crude oil to decline to $72/barrel in twelve months and $62 by early 2014.  Such a decline would do wonders for consumer/commerce Confidence, but it will take a very long time for the baked-in ramifications to the economy to fully expire.

USDollar - Ironically, triple-digit crude prices have been 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;  and the inability to pass the 2011 Budget on a timely basis as well and the related threatened Gov't shutdown in April 2011.

If not enuf, the looming National Debt (as illustrated by my 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 20% in the last 33 months despite general EURO malaise.

This debasement commenced in January 2002, was truncated by the safe haven activities in 2008, but the latest resurgence is responsible for a $16 component of today's $105 contract crude.  To give context to the volatility, this same factor was a record $30 in July 2008 and a mere $1/barrel on the day of Barack Hussein Obama's inauguration.  On the bright side, the secular decline of the Dollar has led to a series of new records for Exported goods.

Debt Rating Downgrades - The USA's AAA sovereign bond rating was rightfully cut in July/2011 by Egan-Jones (S&P in Aug).  Switzerland, Germany, Canada, Australia, Brazil and others have long had better fundamentals.  My Debt Wall chart currently projects USA sovereign debt will finally be downgraded to a "B" rating upon re-attaining a 3.1% Deficit/GDP ratio in 2022.  Similarly, a potential Treasuries Crisis will ensue upon assessment of a "C" rating on 10yr/30yr instruments in latter 2022 upon Debt/GDP re-attaining a 90% ratio.  For those who question the Tea-Party inspired conditions on raising the Debt Ceiling, the $2 trillion expenditure cutback over ten years still results in the Federal Debt rising to $21 trillion by 2021 (from $15 trillion today).  Context is everything.

~

TRI:  timely & accurate ~ Back on November 26 2008, the TRENDLines Recession Indicator warned of Q4 GDP approaching whilst BEA was only just announcing 0.5% GDP for 2008Q3 (later revised to -3.7%).  Non-TRENDLiners had to wait a long thirteen weeks to hear the harsh reality from BEA, bank economists & the media pundits!  They were told it was -3.8%; and only on July 29 2011 did BEA finally declare it to be -8.9% ... 32 months after my chart was posted on the Web!  Similarly, it won't be possible to compare today's (2012/1/27) TRI inferred March (Q1) GDP estimate of 1.0% to a BEA number for over thirteen weeks (late April).  Stay tuned to TRENDLines for the very best in timely, accurate & dynamic outlooks...

TRI baseline & caveat ~ BEA amended their past years quarterly GDP figures by as much as 1.5% last year & 2.1% in July 2011.  While the TRI benchmarks are recalibrated regularly, we have mostly avoided indexing to GDP since most BEA revisions serve to re-confirm our own analysis of economic activity.  The view of the future via TRI is dynamic and subject to and guided by current/future mitigation activity by the Federal Reserve & the Treasury Secretary via monetary/fiscal policy, geopolitical and weather related events.

Fundamentals Backgrounder  (rev 2010/12/22) ~ We predicted in late 2008 that a rebound would stem from Inventories being at business cycle lows,  The correction prompts an increase in average weekly hours, followed by more overtime, and finally new hiring.  In the jobless recovery of the 2001 Recession, the U-6 Unemployment Rate peaked 23 months past the trough.

This time the U-6 top occurred only 9 months post-trough.  In that respect, Mr Bernanke should note our canary in the mine, Real Unemployment, is uncomfortably close to suffering a relapse.  The rate has drifted back up to 17.0% ... a tad below the 2009 high of 17.4%.  With lotsa deficit related State and possibly Federal layoffs ahead, it is uncertain whether remaining stimulus job creation can outweigh losses.

Much of the uncertainty surrounding the prospects for the USA stems from the inability of Congress & the President to address runaway structural Deficits and the resultant mounting Federal Debt.  This has not gone unnoticed by foreign investors and a secular debasement of the USDollar commenced in January 2002.

Feeling the pinch, petroleum exporters began to factor this component into their crude pricing starting in 2004.  As illustrated in our Barrel Meter chart, crude costs rise as the Dollar devalues and this is a trend that will continue 'til the Debt Wall issue is substantially resolved.

Canadian Prime Minister Stephen Harper's cunning strategy to secure G-8/G-20 agreement for nations to sign on to an aspirational halving of their fiscal Deficits by 2014 caused much needed and timely confidence to infiltrate the international investment community. The EUR:USD exchange had plummeted last Summer to a 1.18 rate.

Assisted by the UK Conservative Party's historic austerity announcement in the days before the Summit ... and wide adoption of that measure by the EuroZone, the exchange rate seemed to re-stabilize at a 1.30 rate. Then a few weeks ago we saw Congress (which had transitioned to electioneering mode) make noise insinuating it would be wise to extend some or all of the Bush tax cuts to give the economy some added stimulus - in the face of an apparent double-dip.  In a blink ... the EUR:USD reset @ a 1.36 rate!

The USA is finding out what Europe noticed this Summer:  the bond & currency markets are taking an IMF-EuroZone approach to assessing a nation's fundamentals.  Short term fiscal stimulus funded by Deficits is condoned, but only if the created Deficit/GDP ratio is limited to 3%.  In turn, the resultant accumulated debt should not take the National Debt/GDP ratio above 90%.

There is some flexibility for those nations who may be exceeding one ratio but are far below norms on the other.  A country is also allowed deeper sinning if its Debt is

mostly domestic (eg Japan).  If there is no latitude for Deficits and increased taxation is not an option, austerity measures are the only alternative.  Defiance of this principle exposes a nation to the bond vigilantes.

If the USDollar declines too much it can become troublesome for the American economy. I have stressed for some time that a falling buck causes rising oil prices.  With rising crude comes increases in gasoline and diesel prices, to the extent where pump price can approach the same Gasoline/GDP ratio that decimated New Car & Light Truck Sales in 1980, 1990 & 2007.

The threshold, rising with nominal GDP, was $3.19/gallon gasoline ($86/barrel) in the last breach event. With the subsequent rise in nominal GDP, the ratio is reflected today by $3.30/gal gasoline ($89 crude).  See our Gas Pump discussion for more. Vulnerable sectors will shortly be reflecting the havoc of rising energy costs. Another critical juncture occurs if oil passes thru the $106/barrel threshold:  another round of G-20 Recessions.

TRI was the first mainstream analysis to provide alerts twelve months ago that the Recovery under way was facing potential median term deterioration.  By February 23rd 2010, the Indicator signaled the first alert of a potential double-dip.  In a gross misstep, attempting to deflect attention from itself, Wall Street began to

spotlight a host of countries with flaky sovereign fundamentals:  Argentina, Iceland, Dubai-UAE, Ireland, Greece, Spain, Portugal, Hungary & Italy.  Unfortunately, upon running out of nations, the same scrutiny by media and bond vigilantes on Deficit & Nat'l Debt to GDP ratios began to be assessed on the USA itself.  Trendlines welcomes this development as it builds on an awareness campaign we have been engaged in for over a decade (see our Debt Meter).

As more stakeholders became educated, TRI sensed an accelerated date for impending USDollar debasement, moving the prospect of a double-dip into the short term window.  Then in late Summer, Congress & the White House seemed to have gauged international events as a clear message advising them to avoid renewing the Bush tax cuts set to expire at year-end.  Extending them would act as an indirect fiscal stimulus measure; but also exacerbates the Deficit/Debt Wall concerns. 

The good prospect of ending the Bush Tax cuts resulted in a shifting of the double-dip event back to the 2011Q3 time frame in our July update.  Adding in fiscal/monetary mitigation by Congress & the Fed seemed to have provided a sea change of better economic news to the extent that prospects of a double-dip completely evaporated.  With national median price having corrected in January 2009, the absence of a Housing Bubble has laid foundation for rebuilding homeowner equity, wealth effect and ultimately consumer/commerce confidence.  This will be needed to offset the decision by Congress to go for a two-year extension of the Tax Cuts.

the TRENDLines Recession Indicator reflects 98 economic factors (FRB).  Its baseline GDP guidance to 2035 with minimal false positive/negative signals weighs 14 forward-looking data sets incl Animal Spirits & my Realty Bubble Monitor, Barrel Meter, Gas Pump & Debt Meter model projections

Recession Backgrounder  (rev 2010/12/22) ~ As illustrated in our long term chart, the 2009 Recession was the most severe downturn of economic activity since 1975, as measured by the TrendLines Recession Indicator (TRI blue line).  Alternatively, a view of monthly GDP data (yellow line) reveals this was the worst event since 1982.  But based on BEA's annual data, it was the worst episode since 1946.  The February 2009 decline of 7.7% compares with recent Monthly lows of -2.3% in 2001, -3.5% in 1990, -8.8% in 1982, -10.0% in 1980, -4.8% in 1975 & -5.9% in 1970.  The 2008Q4 Real GDP decline of -6.8% compares with recent Quarterly lows of -6.4% in 1982, -7.9% in 1980 & -10.4% in 1958.  In turn, the recent record quarterly highs were 16.7% in 1978 & 17.4% in 1950.

Recent Annual Real GDP growth rates:  -2.6% (2009), 0.0% (2008) & 1.1% (2001).  Last year's annual contraction compares with post-WWII declines of -0.2% in 1991, -1.9% in 1982 & -0.3% in 1980, -0.2 in 1975, -0.6% in 1974, -1.0% in 1958, -0.7% in 1954, -0.5% in 1949 & -11.0% in 1946.  The Great Depression saw contractions of -8.6%, --6.4%, -13.0% & -1.3% in 1930 to 1933 respectively, followed by a -3.4% contraction in 1938 in a failed attempt by policy makers to balance the Budget.

By some strange coincidence, the 1929 to 1933 era saw both GDP & CPI collapse 25% & Unemployment rise to 25%.  The Great Depression's GDP averaged -7.3% over 43 months (14 quarters).

This event was the longest since the Great Depression.  Over its 6 quarters, GDP averaged -2.3%.  As an NBER defined event, the downturn escalated to a Severe Recession in June 2008, after entering a Technical Recession in December 2007.  The low point for its broad growth metric was -6.8% in 2008Q4, -7.5% by monthly data, with the episode declared over by NBER in June 2009 (19 months).

Measured by the Trendlines Recession Indicator (TRI), the contraction lasted 21 months (April 2008 to November 2009) and averaged -4.3%.  Another four months and this event would have been a full fledged Depression!  Such a scenario was narrowly averted by prudent fiscal/monetary policy intervention.  The downturn bottomed @ -8.1% in January 2009 ... just a tad shy of the post 1946 monthly low of -8.3% in January 1975.

As in the 2001 Recession, many in the mainstream media have been visibly confused as to the Recession's end date.  Because 2001 was a "jobless recovery", the MSM irresponsibly featured several McBears rationalizing, waiting for (and hoping for) a "double dip".  Their talking down of the Economy broke both consumer & business Confidence long after the Recession was over.  The Media was instrumental in the Unemployment Rate continuing to get worse thru 2002 & 2003, albeit GDP was rising after the Nov 2001 end date of that Technical Recession.  With a financially struggling Media desperate for ratings, this phenom is in play again and will likely continue into 2011 despite

overwhelming evidence the Recession has been over since June 2009.

BEA's downward revision of GDP figures in July (as much as 1.5% for some quarters over the last three years) brings GDP in line with TRI.  The corrected divergence is not unprecedented.  On the way down, we were similarly distressed at the original 2008Q3 number of 0.5% while TRI was inferring -3%.  We were overcome with relief upon BEA's eventual downward revision to -2.7%!  Shortly thereafter, 2008Q4 was announced at -3.8% compared to our Meter Index inferred -9.8%.  BEA has since downgraded that quarter to -6.8%!

 Downward revision of post trough data is less probable.  The 40-yr chart is instructive in its revelation that in each post-Recession Recovery, GDP far outpaces our TRI for the first three quarters ... probably reflecting the artificial nature of Keynesian Fiscal Policy.

The 2009 Recession had its roots in the inevitable Realty Bubble correction.  The irrational exuberance in the Housing sector stems from irresponsible Legislators that fuelled the subprime mortgage availability;  hiding those toxic mortgages within conventional Securities; and negligence by the Rating Agencies in granting these instruments favourable risk status.  Using annualized figures, the Realty Bubble maxed out at 28%

It is noteworthy that the trough of the Recession coincided exactly with our determination of the Housing bottom, as we forecast it would in late 2008.  Both New & Existing Home Prices returned to their secular Price/Family Income ratio trend level in January 2009.  The halt in equity loss at that juncture did much for the substantial and predicted upticks in consumer/commerce Confidence levels.  Also quite helpful was the simultaneous bottoming of crude & gasoline prices a month earlier, which in turn spawned a bottoming of New Car sales in February 2009.

"McBears" coined by F Hutter 2010/9/30

 ~

blast from the past & chart update:

July 21 2010 ~ Due to exorbitant gasoline and diesel prices at the pump, USA Car & Light Truck sales collapsed in 1980,  1990 & 2007.  On its present trajectory, the same fuel cost/GDP ratio that initiated these episodes of dramatic demand destruction will be revisited upon $3.42/gallon gas ($92/barrel crude) ... probably in 2011Q1. 

Ignoring the Cash-for-Clunkers anomaly, annualized sales have climbed back to as high as 11.8 million from 9.1 in Feb/2009.  See our Gas Pump & Barrel Meter charts for lots more discussion on the real factor thrusting the USA economy into double-dip.

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