Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Q2 Economic Contraction Highly Probable

Economics / Double Dip Recession May 15, 2011 - 12:50 PM GMT

By: Tony_Pallotta

Economics

Best Financial Markets Analysis ArticleRecently I have been discussing the possibility that the US economy is in fact in a period of contraction. I want to revisit that call as I don't loosely throw out such a statement without backing it up with real data. Q1 2011 GDP was 1.77%, a 43% reduction in Q4 2010 GDP of 3.11%. Although Q1 GDP could be revised higher over the next two revisions it did highlight three sources of contraction.


Initial data for April has further supported potential economic contraction with four regional Fed manufacturing surveys showing a sharp reduction in growth, near outright contraction in ISM Services, a very sharp increase in weekly unemployment claims and a deteriorating trade deficit.

You don't need to be an economist to understand GDP in its most simplest terms.

GDP=Consumer+Government+Investment+Trade

The following table shows how each component has contributed to economic growth over the last two years. The red highlights are those the economy is most vulnerable to.

Components of GDP 2009-2011

Consumer: The consumer continues to hold up relatively well and has averaged 71% of total GDP since January 2009. Needless to say the consumer needs to be able to hold on here. There is no reason to count them out in Q2 or in the foreseeable future.

The one caution though is disposable personal income (income after taxes) on an inflation adjusted basis over the past six months has contracted when adjusting for the temporary reduction in FICA taxes. The combination of government aid and delinquent homeowners (average time without paying a mortgage is now 400 days) are keeping the consumer afloat.

Bottom line the consumer should continue to support the economy in the short term regardless of their lack of real organic income growth.

Government: The government was a net drag on economic growth the past two quarters. State governments are forced to balance their budgets and as tax revenues fall (falling property tax a big source) it is probable they will continue to contract. This leaves a big question mark with the Federal government and the reality they cannot expand further stimulus such as the FICA tax reduction.

Bottom line government is likely to contract further with a low probability of it contributing to growth in Q2.

Investment: There are two components to investment (1) inventory and (2) fixed investment. After five quarters of growth and rebuilding bare shelves inventory contracted -3.42% in Q4 but saw growth of 0.9% in Q1. Current inventory to sales levels suggest inventory could see further growth but why the sudden deterioration in economic data in April, primarily jobless claims? Did manufacturers and retailers get spooked in which case they are less likely to expand inventory levels? That is quite possible.

The contribution from Fixed Investment dropped from 0.8% in Q4 to 0.09% in Q1 driven from a 75% reduction in growth in non residential, primarily structures.

Bottom line investment could easily contract versus contribute to growth in Q2. Are manufacturers willing to expand current inventory levels? Who will finance new construction spending and is there demand for such investments?

Trade: This appears to be the most vulnerable source of contraction in Q2. In Q4 the trade deficit improved and in fact was a positive contribution to growth of 3.27% (when total growth was 3.11%) but then reversed to -0.08% in Q1. Most recent trade data shows the trend deteriorating further.

Bottom line trade will be the most likely source of contraction in US GDP as exports fail to maintain the pace of rising imports.

In closing I want to visit one final reason why economic contraction may very well come sooner than most expect. There is no growth in credit formation. Since Q4 2008 total loans and leases (credit outstanding on bank balance sheets) for JPM, C, WFC and BAC contracted 7.1%. In other words the largest sources of private credit are not lending but rather pulling in credit.

Loans and Leases

Without private lending this leaves the real "Bank Of America," the US government.The most recent consumer credit data shows the role the government is playing in expanding credit. Since 2009 government funded credit has risen 91%. Since 2006 it has risen 285%.

Lastly, the above scenario is based on one highly probable reality. The US government fails to address the growing national debt and is able to kick the can beyond the 2012 presidential election. As the data shows without the real "Bank Of America" or the Fed the level of contraction will be unprecedented.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright  Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules