There's been increasing talk of a double dip recession lately. I highlighted my thoughts on this topic here. In this post I want to examine what led to the double dip talk.
1.) Europe: this is the big cause. IIRC, the news swarm started with Greece announcing that their books were cooked in some way, meaning their budget deficit was larger than thought. However, regardless of the reason, Greece started the basic problem. What the market is completely discounting is the European response -- the pledge from the EU and the IMF of nearly $1 trillion in assets to bolster various debt markets. A recent Bloomberg poll said less than a third of respondents had faith this plan would work. That is the real issue here -- despite a logical policy response (their very own Euro-Tarp) the market does not have faith that market participants will make it work. I disagree with that assessment.
2.) Retail sales. US retail sales dropped 1.2% in the latest report. However, this number is in a clear uptrend, meaning last months data was one month of data in an otherwise good series of numbers. Simply put, placing a great deal of weight on one month of data isn't a good idea.
3.) Employment: the latest employment report was terrible. Again, it was one month of data in an otherwise encouraging trend. However, there are important issues here -- initial unemployment claims and the long-term unemployed continue to be issues.
So -- there are two events which are leading to this discussion about a double dip: the lack of conviction on the part of traders regarding the EUs ability to carry out its bail-out and the long-term unemployment situation in the US. I place little credence in the first concern. If the EU wanted to disband, the Greek situation would have been the perfect catalyst. Yet instead they doubled down, indicating a desire to make the union work at extraordinary cost. That tells me the union will do anything it can to make this work, thereby negating the concerns.
The second situation is an issue going forward. However -- as with retail sales -- we had one month of bad data in an otherwise good trend. A I have mentioned on a regular basis, my big concern going forward is initial unemployment claims. This number has moved sideways since the beginning of the year and remains above the 450,000 area. This has to start coming down and soon.
But consider this post on the most recent Beige Book and Flow of Funds report. Most indicators are pointing to an expanding economy. This seriously dents any double dip argument for now.
Simply put, I still don't see a double dip in the cards yet.
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