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 USA Structural GDP improves to -4.2% in January

April 30 2013 delayed FreeVenue public release of Jan 30th MemberVenue guidance ~ For most of 2012, TRI's measure of animal-spirits-plus had been signaling a building surge in 2013Q2 ... in anticipation of a Romney victory.  But since the Election the prospect for a robust Spring has waned with each passing week.

The TRENDLines Recession Indicator monitors two measures of the USA economy:  Structural GDP (TRIX) & Real GDP (TRI).  The model suggests since 2007 Real GDP essentially has been a proxy for the genuine underlying Structural GDP being buoyed by Congressional Deficits via the action of fiscal multipliers.

 TRI   This month's guidance suggests baseline Real GDP has been progressively building since the Spring 2011 pause ... and remains en route to a damped Spring 2013 surge.  TRI's depiction of economic activity conflicts significantly with today's announcement by BEA its first estimate for December (Q4) Real GDP is -0.1%, a number likely to face upward revision when compared to the 1.5% pace gauged by TRI.  January GDP is assessed @ 1.8%, while TRI's measure of animal-spirits-plus projects a 1.7% Q1 and 2.7% crest in June (Q2).

TRI forecasts GDP growth rates are entering an era of multi-decadal sub 2% performance.  That said, today's trajectory reveals the defined headwinds are not so fierce as to induce business cycle soft-landings, contractions or NBER-defined Recessions thru the model's 2030 horizon.  This prognosis is in conflict with my original Sept/2009 analysis of USA economic activity over the past four decades and its conclusion of the existence of an 8.5-yr business cycle with probable troughs in 2017, 2026 & 2034.

It appears the magnitude of the Great Recession and its significance as a once-in-a-lifetime "balance sheet recession" event has temporarily blown out the harmonics of natural rhythms.  The associated deleveraging is ongoing, but it must be said the generally subdued post-Recession economy continues a secular decadal downtrend of GDP growth rates.  This decline trend is typical of maturing economies as well as the result of activism among G-20 central bankers aimed at damping the amplitudes of the business cycles.

The timing of an eventual hard or soft landing will change as inflation and inventory factors come into play.  Layered over those natural cycles will be the mitigation efforts:  Monetary Policy actions by the Federal Reserve's FOMC & the Treasury Secretary's guidance to Congress with respect to Fiscal Policy.

But frankly, discussions surrounding GDP movement over the past ten years are dealing with the surface symptoms of economic activity ... not the underlying problems.

 TRIX   The above discussion is typical of conventional Real GDP narrative.  But the extent of the malaise of the American economy is best comprehended when economic activity is viewed thru a prism which unveils the influence of the Federal Gov't Deficits (and occasional Surpluses).  This is accomplished by via the filter of fiscal multipliers.  The resulting metric (Structural GDP) is depicted in the chart as TRIX (black line).

The long-term TRIX chart reveals the natural business cycle may be a slightly shorter 8-years (96-months) rather than the 8.5-yr conclusion of my previous analysis.  The 1974-'76 event was a Structural Severe Recession (-1.9% avg SGDP over 11 Qtrs).  This was followed by the 1979-'86 Structural Severe Recession (-2.0% avg SGDP over 31 Qtrs).  On its heels was the 1988-'93 Structural Severe Recession (-2.4% avg SGDP over 20 Qtrs).  At that juncture, one can't help but notice the outstanding prosperity of the 1994-2001 era.

2001?  Yes.  TRIX does not recede 'til Nov/2001.  What we know as the NBER 2001 Technical Recession in Real GDP terms, is nowhere to be seen.  This analysis presents the surprise revelation the 2001 event was in fact created by the 1998-2001 Surpluses.  In short, the Congressional fiscal policy action of balancing the Federal Budget appears to have induced the mild 2001 Recession!  Conversely, a virtually hidden Structural Technical Recession appears in 2002-2006 (-0.7 avg SGDP over 18 Qtrs) went unnoticed due to masking by the Bush-era Deficits.

The current epic event is truly massive and not yet commenced its Recovery phase.  The TRIX contraction began in March 2007, troughed at -13.6% in Jan/2009 and improved to -4.2% in January.  With SGDP averaging -7.1% over the last 24 quarters, TRI's visible horizon shows no sign of resurrection of this Structural Depression 'til after an inevitable Greek-scale Treasuries yield (7%) crisis in 2027 (and perhaps IMF intervention).

To add some context to the Great Recession historically, SGDP avg'd -9.7% during the four worst years of the Great Depression (1930-1933).  The current event already has a six year span (2007-2012 & -7.1%).  SGDP was -17.1% in the worst year of the Great Depression (1932).  It was -11.2% in 2009.

The Congressional fiscal policy of employing five massive trillion dollar Deficits to give a Keynesian kick to the economy indeed assisted in reducing unemployment and kept Real GDP for three years, but continuing this measure will have dire repercussions.  The TRI model projects debt service on an accumulated $18 trillion federal debt starts to crowd out federal program spending in April 2015.  Any hopes for attaining the critical mass for a sustainable economy are dashed at this juncture.  And as the long-term chart illustrates ... TRIX plummets.

It may be this realization which is quietly extinguishing entrepreneurship in America.  47% of its citizens are takers.  It is the Obama doctrine:  Ask not what you can do for your country.  Ask what the Gov't can do for you!

The future presents a truly ugly Catch-22 scenario.  Congress will find it must continue its trillion dollar Deficits to sustain positive Real GDP.  However this practice bloats the federal debt and invites the bond vigilantes.

The TRENDLines Debt Wall model projects Structural Deficits will rise to $1.7 trillion by 2027.  The Debt will be $32 trillion.  With the Deficit/GDP & Debt/GDP ratios rocketing to 6% & 107%, the US Treasury will be facing long-term yields of 7% on new borrowings.  It will implore Congress to implement horrific austerity measures.  If Congress takes action, unemployment will soar and the economy will stall.  But if Congress is as dysfunctional in 2027 as it is today, the crisis will take on Greek-scale proportions and the US Gov't will have no option but to seek IMF intervention the following year.  Being unsure as to whether a phoenix rebirth of the private sector will follow this episode, the TRI visible horizon has been truncated at 2030 today.

 Headwinds   Factors contributing to short/medium/long term weakness of the RGDP & SGDP outlooks continue to be:  (a) political dysfunction;  (b) stubbornly high unemployment;  (c) rising international inflation & interest rates;  & (d) structural deficits and sovereign debt rating downgrades.  The threat from residual high petroleum costs was finally eliminated last month.

A previous headwind, High Petroleum Costs, has been eliminated.  The TRI model estimates the residual effect of cumulative quarters of high petroleum costs shaved 1.55% off the June 2008 Real GDP growth rate and a new record 1.60% was pared off the April 2011 GDP pace.  The metric has been steadily declining and all baked-in effects were finally completely exhausted in Jan/2013.  It should be stated the American economy is much too diversified and per capita disposable income is too large for high petroleum costs to induce a Recession.  Just shy of the level where oil price would harm the US economy, the more vulnerable G-20 nations are already going into Recession and paring back Demand.  The definitive Oil/GDP ratio where this occurs is currently $127/barrel RACrude ($122 WTI).

That said, those high prices can damage susceptible sectors.  The TRENDLines Gas Pump model has revealed there is indeed a gasoline price threshold which if surpassed harms the auto sector.  Upon breaching a definitive gasoline/GDP ratio in Jan/2012, USA all-grades gasoline had once again exceeded a definitive petroleum/GDP ratio with a history (1980/1990/2007/2011) of signaling downturns in Light Vehicle Sales via buyer resistance to excessive gasoline & diesel costs.  This threshold is $3.47/gal ($109/barrel) today.

   (a)  Political Dysfunction   Cynicism among voters with respect to ethics and integrity in Washington gave rise to the Tea Party movement.  One of the world's most corrupt electoral systems has led to utter dysfunction in halls of Congress.  Many Congressmen appear beholden to donors.  Their fundraising activities (and those of the President) occupy far too much of their weekly tasks.  Crucial legislation always seems too close to the next election.  The lobby sector is worth billions.

Most every bill is filibustered.  60 votes is the new definition of majority in the Senate.  Because a Budget has not been passed since 2009, Continuing Appropriation Resolutions and the federal Debt Limit extensions essentially have become a proxy for the nation's Budget debate.

It is a malaise that does not distinguish Parties, has infiltrated several White House administrations and apparently has spread to the State legislatures and municipal councils.  Polarization and adversarial politics has unseated the spirit of compromise.  The gridlock stymies good and critical legislation and is at the root of the breakdown in consumer/commerce confidence levels.

Mismanagement of the fiscal affairs has stymied Keynesian options in the aftermath of the Great Recession.  Whilst China, Canada & other G-20 nations are engaged in infrastructure spending, the US Gov't finds its 104% Debt/GDP ratio prevents such endeavours.  Instead Congress borrows a trillion a year just to keep the phone & lights on...

   (b)  Unemployment   Many of the macro stats have been tainted over the past three years 'cuz so many folks are still victims of  the Great Recession.  Clearly the 12.3 unemployed (U-3) and 10.4 million under-employed & marginally attached souls on the sidelines are a drag on the economy.  At 14.4% 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.

The TRI model calculates headline U-3 UR is on a glide path which won't see equilibrium (6.0% natural unemployment rate) 'til late 2015.  That said, the wide-spread malaise persists.  This level of progress does not reflect so much a marginally improving economy as it does the realities of an aging society.  From Jan/2011 and thru the following 19 years, 10,000 boomers a day are turning 65 years of age.

Boomers are the 77 million Americans born 1946 through '64.  The number of people eligible for SS will nearly double from 46 million to 80 million by the time all the boomers reach 65.  So the big question is of the 150,000/month potential, how many are retiring?  The participation rate has been in secular decline since Y2k due to boomers leaving the labour force and it is a trend which will continue for a couple of decades.

So in short, with this many folks not working and so many graduating students and immigrants not able to get their first jobs, the economy remains in a rut.  If there is any good news out there, it would be the economy is finally surpassing the 104k new net job creations per month required to hold the unemployment rate static considering graduating students and immigration.  This progress would be jeopardized by any attempt to raise the federal minimum wage.

   (c)  Rising International Inflation & Interest Rates   TRI currently forecasts the normalization of US interest rates will commence in 2015Q1.  But regardless of FOMC activity and targets, rising commodity prices and general global inflation in the meantime means the housing sector may already be facing a 2% rise in 5-yr mortgage rates by that juncture ... long before the domestic economy can handle them and thus yet another potential medium-term headwind.

   (d)  Structural Deficits & Sovereign Debt Rating Downgrades

The USA's AAA sovereign bond rating was rightfully cut in July/2011 by Egan-Jones (S&P a month later). Egan-Jones trimmed it again in Sept/2012. The remaining AAAs (Australia, Canada, Denmark, Finland, Germany, Luxembourg, Netherland, Norway, Singapore, Sweden, Switzerland & UK) have long had better fundamentals.

Failing mitigation, the structural deficits and realities of compound interest will see the Federal Debt double to $32 trillion by 2027.  Having the ability to print currency, it is of course highly improbable the Federal Gov't could ever actually default so fear of redemption is not really an issue.  Rather, rising yields would reflect the prospect of inflation (from excess printing), currency debasement and the derogatory effects upon repatriation of foreign invested funds.  Further, the sale of bonds in a rising yield environment will require deep vendor discounting.

The TRENDLines Debt Wall model projects the USA federal gov't Deficit will bottom @ $644 billion in 2015.  Compounding interest on the federal debt will start to significantly crowd out program spending in 2015Q2. From that juncture entitlement programs lead to even larger structural Deficits (2027:  $1.7 trillion) and it will be obvious to international and domestic investors in treasuries that the growth rate in deficits and debt is unsustainable.  The US Gov't will start to attain Greece-scale metrics in 2027.  This will induce ratings downgrades of long-term US debt.  The bond vigilantes will  move in.  And rising yields will put additional pressure on debt servicing and in turn raise the deficit even further.  Congress will be prompted to increasingly slash program spending and/or raise taxes ... both being recessionary factors.  If they find dysfunction prevents them taking action, the Treasury Dept will have no alternative but to request IMF intervention in 2028.

The Debt Wall model forecasts the unfolding of this scenario will be signaled by a incremental downgrades of America's sovereign debt ... to "B" in 2018 & then "C" in 2024.  Yields on treasury bonds will climb towards 7% in the latter stages of this crisis.

Intervention by the Republican Party via conditions for subsequent Continuing Appropriation Resolutions (as per the 2011 Debt Limit extension negotiations) may be the salvation from this scenario.  In the absence of a federal Budget since 2009, the CAR is an appropriate checks & balances tool to strive for fiscal responsibility.  If the GOP forces Congress to slash program spending dollar-for-dollar for Debt Limit increases, the aforementioned 2027 target for the Federal Debt could be trimmed back to $27 trillion by 2017!

 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 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 ... by some measures down 10% in the last 36 months despite general EURO malaise.

The USDollar has been debased 40% since January 2002.  The journey was truncated by safe haven activity in 2009, but the latest relapse is responsible for a $17/barrel component of today's $92 USA RACrude price.  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 first inauguration.  On the bright side, the secular decline of the Dollar has led to a series of new records for Exported goods.

 Animal-Spirits-Plus vs the Black Box   TRENDLiners will remember in July 2011 TRI conversion of medium-term leading data sets began warning of sub 1% GDP ahead in 2012.  A month later, it appeared the downturn could lead to a limited contraction.  But on Sept 26/2011, TRI gave the "all clear" upon finding the negative inference was a mere anomaly within the forward-looking data.  Every monthly release from that episode to late May upgraded Year 2012 GDP.

Such is not the case for the perma-bears.  As of Jan/2012, David Rosenberg is stalwart in his 2010 position the USA entered an economic Depression in 2007 which will manifest itself in up to four more Recessions by the end of the decade.  In Aug/2011, John Hussmann proclaimed the USA was entering a double-dip Recession.  On March 27 2012, Robert Schiller forecast realty prices may plunge another 20% and would not see new highs for five decades.

But the boldest claims in the face of current realities come from what CNBC fondly call's the ECRI black box.  Lakshman Achuthan was adamant any attempts by the FOMC to halt an NBER defined Recession which had commenced Sept 23 2011 would be in vain.  In the face of an annoying 3% Q4 GDP and ECRI's first false positive signal, Achuthan again went to the airwaves on Feb 27 2012 to declare yet another new Recession would commence in 2012Q3.  In recent weeks Achuthan has reverted to the first call and mused often the BEA would downgrade 2011Q4 & 2012Q1 GDP by 3% in its scheduled July 2012 annual revisions ... thus revealing the USA was in Recession all along.  Instead, BEA knocked down the numbers by only 1.1% & 0.1% respectively.  Oh well...

Their clients must be pissed.  The S&P500 was 1055 when Rosenberg told 'em to hunker down.  1119 when Hussmann said the same.  1136 on ECRI's announcement.  Today the S&P500 is 1502 ... and housing is up $17k from this time last year!  The gross miscalculation by these practitioners can be directed at their failure to quantify the benefit to Real GDP by the five massive trillion dollar Congressional Deficits and the dozen more to come...

 the Great Recession retrospect   The NBER declared this event commenced in Dec/2007 and came to an end in June 2009 (19 months).  The American economy finally surpassed the Nov/2007 $13.33 trillion Real GDP high water mark in Sept/2011.  This marked the transition from recovery mode to expansion of the new business cycle.  So with the advantage of this most recent revised economic data from BEA, it appears the contraction lasted from Dec/2007 to Mar/2009 (16 months) with an avg Real GDP of 3.1%.  TRI's measure of baseline GDP finds a deeper downturn lasting from Dec/2007 to Aug/2009 (21 months) with an avg RGDP of 4.6%.

To add some context to the Great Recession historically, SGDP avg'd -9.7% in the Great Depression's 1930 to 1933 depths.  The current event has a longer breadth (2008-2012) already but has an avg SGDP of only -8.0%.  SGDP was -17.1% in the Great Depression's worst year.  It was -12.2% in 2009.

Two main factors pushed the US economy into this correction:  the 2005 Realty Bubble & the abrupt increases of Federal Minimum Wage.  Median home prices rose to 52% ($75k) above historic norms resulting in extremely high mortgage and rent payments, robbing many families of disposable income which should have been spent on goods and services.  It took four years for home prices to get back to historic norms.

When Structural GDP was teetering near stall speed in Feb/2007, Federal Minimum Wage was $5.15/hr.  But by a mere 29 months later, Congress had raised it a stunning 41% (to $7.25).  Many firms could not justify paying unskilled labour (present & potential) these new rates.  There was pressure from the tier above to have their remuneration increased to $6, $7, $8 & $9.  By Feb/2010 (36 months), the unemployment rate had shot from 4.4% to 8.3%.

 Residual high Petroleum Costs Retrospect   This previous economic headwind has been eliminated.  The TRI model estimates the residual effect of cumulative quarters of high petroleum costs shaved 1.55% off the June 2008 Real GDP growth rate and a new record 1.60% was pared off the April 2011 GDP pace.  The metric has been steadily declining and all baked-in effects were finally completely exhausted in Jan/2013.  It should be stated the American economy is much too diversified and per capita disposable income is too large for high petroleum costs to induce a Recession.  Just shy of the level where oil price would harm the US economy, the more vulnerable G-20 nations are already going into Recession and paring back Demand.  The definitive Oil/GDP ratio where this occurs is currently $127/barrel RACrude ($122 WTI).

That said, those high prices can damage susceptible sectors.  The TRENDLines Gas Pump model has revealed there is indeed a gasoline price threshold which if surpassed harms the auto sector.  Upon breaching a definitive gasoline/GDP ratio in Jan/2012, USA all-grades gasoline had once again exceeded a definitive petroleum/GDP ratio with a history (1980/1990/2007/2011) of signaling downturns in Light Vehicle Sales via buyer resistance to excessive gasoline & diesel costs.  This threshold is $3.47/gal today.

That said, those high prices can damage susceptible sectors.  The TRENDLines Gas Pump model has revealed there is indeed a gasoline price threshold which if surpassed harms the auto sector.  Upon breaching $3.37/gal in Jan/2012, USA all-grades gasoline had once again exceeded a definitive petroleum/GDP ratio with a history (1980/1990/2007/2011) of signaling downturns in Light Vehicle Sales via buyer resistance to excessive gasoline & diesel costs.

The PSC represents a definitive Petroleum/GDP ratio where certain demand destruction feedbacks attain critical mass.  As happened in the Summer of 2008, Demand and Price are reversed as alternative energies, substitution and conservation measures are pursued.  The negative effects of rising energy costs on the disposable income of consumers and the profits and viability of commerce and institutions inevitably takes a toll on the American economy.

Superb accuracy makes the TRENDLines Recession Indicator (TRI) the premiere composite economic leading indicator available in Canada, China & USA

blast from the past...

blast from the past:

<<<  Jan 27 2012  (one year ago)

Twelve months ago the ECRI Recession was no where to be seen and in fact TRI was suggesting the economy would experience a strong rebound in the weeks prior to Election.

blast from the past:

<<<  Sept 26 2011

What Recession?  While Hussmann, Rosenberg & ECRI were all declaring the USA had entered a Recession so deep the FOMC would be impotent to mitigate the damage, TRI USA was projecting clear sailing ahead.  BEA has since announced 2011Q4 was 4.1%, 2012Q1 was 2.0% & 2012Q2 was a 1.3% pace.  No false positive signals in this chart!

blast from the past:

<<<  Dec 23 2008

The TRI-USA model was the sole forecasting tool warning GDP was in the -10% vicinity in 2008Q4 in real-time.  BEA had been reporting a mere -0.5% pace.  Finally on July 29 2011 BEA finally made its Q4 GDP -8.9% revision.

Archive Highlights

Background  (2012/6/20) ~ Due to Israel's disappointment with Obama's apparent decision to water down the Iran nuclear issue agreement in a quest to achieve it prior to Election Day, one must also consider the probability the downtrend in oil price could be temporarily truncated by an independent Israeli raid. Should present multilateral talks wrt Iran appear to be breaking down, trader anticipation of fighter sorties will spawn a resurgence in crude prices. This assists Iran's fiscal situation and Israel may opt to go sooner rather than let them benefit from a spike which could go to $110/barrel ($4.15/gal). The models suggest a significant retaliation by Iran could force a short-lived spike to the current Price Spike Barriers of $154/barrel & $4.57/gallon.

Background  (2012/4/27) ~ 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 is waning. Unfortunately, failure by Washington to prudently raise taxes to accompany record spending after the 2001 Recession left the Federal Gov't with a high National Debt and 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 98% & 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.

Background  (2012/3/26) ~ Part of today's 2012 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 via a downturn in Light Vehicle manufacturing and sales.  The negative effects of cumulative fossil fuel price increases are still permeating throughout the economy.

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 $86/barrel in twelve months and $72 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.  Trendlines Research calculates cumulative quarters of high petroleum costs trimmed a record 1.1% off the GDP growth rate in March.  The post-Y2k record for this metric had been 1.0% back in Oct/2008 and was surpassed in Oct/2011.

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.

Fundamentals Backgrounder  (rev 2010/12/22) ~ I 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 26th 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.  i  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.

~

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% ($61,000) above the long term Price/Income trend in Year 2005.  See our Realty Bubble Monitor backgrounder to see how diminishing Disposable Income related to the Housing Bubble led to the general GDP growth rate downtrend that commenced in early 2006, and then declining home prices had the consequence of belt tightening due to negative "wealth effect".

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