Where Is the V-Shaped Recovery?

This week I spoke to a small group of businessmen/entrepreneurs about the current economic environment, and after my presentation one asked me whether I didn't have any good news for them, with a kind of gallows-humor laugh. And I tried. But upon reflection there’s more I could have said. So this week's article will contain what I should have said to be a little more encouraging.

I talked to them about the current economic environment and what I saw coming down the road. Long-time readers know that I think we’re in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That’s what you get when you have a deleveraging environment resulting from a credit crisis. It’s what happens when the Debt Supercycle ends. We start the journey to the New Normal and it just takes time.

"Where Is My V-Shaped Recovery?"

Remember all the bulls and cheerleaders late last year and into this year talking about a V-shaped recovery? They were making their projections based on what had happened in past recessions. I (and others) argued that that data was meaningless, as it didn’t reflect the fact that a balance-sheet recession requires years of deleveraging, is inherently deflationary, and all the factors that produce the normal "V" are no longer in play. Bank-lending is still dropping. Savings rates go up. Debt gets paid down. Governments run into limits as to how much they can stimulate the economy without creating large and destabilizing debt. Central banks push rates to zero, and then what? This is a far different environment than we’ve had for the last 70 years. Using past performance to predict future results when the future environment is significantly different than the period in which the data was collected is misleading at best and worthless at worst, leading to bad decisions; much better to deal with reality.

And just to show that I’m really the optimist in the room, let's turn to my good friend David Rosenberg, writing recently under the following headline: "US Recession Never Ended; GDP to Contract in Q3”
 

Our suspicions have been confirmed -- the recession never ended. Macroeconomic Advisers produces a monthly US real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the MA monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak-to-trough contraction in the 2001 recession was 1.3%! That is incredible.

Interestingly, and dovetailing nicely with our deflation theme, nominal GDP fell 0.3% in May and by 0.4% in June. This is a key reason why Treasury yields are melting.