The (Unofficial) Beginning of the Double Dip Recession
Today, we take a belated bow for calling the “official” end of the recession… by declaring a “double dip” to be unofficially under way.
Last week, the National Bureau of Economic Research (NBER) declared the Great Recession ended in June 2009. Turns out, looking back, we called it in real-time — relying on a single obscure indicator.
It’s called “capacity utilization” — that is, all the plant, equipment and other resources business have at their disposal, and what percentage of it businesses are actually putting to work.
On June 17, 2009, we pointed out that “over the last 40 years, a bottom in capacity utilization has marked the precise end of recessions.”
“Having no interest in real-time forecasting,” we followed up on Aug. 14, 2009, “the NBER won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007.
“Heh,” we concluded “by the time the NBER calls an end to this one, we might have begun another.
And so it goes. Today, we can hardly be precise about when it started. We can only say we believe the “double dip” is already under way.
One “tell” of the double dip: The horrible numbers reflecting private-sector investment. We brought you this last Tuesday, but it’s worth revisiting. The “growth” in GDP that’s come about since June 2009 owes almost entirely to growth in government spending — mostly in the form of transfer payments.
Meanwhile, gross domestic private investment has shrunk from 17.3% of GDP at the recession’s start to 11.3% last year. Worse still is that the majority of that figure is devoted to simply repairing and maintaining existing plant and equipment… and how it’s growing.
Investment in new plant and equipment made up an already low 40% of gross domestic private investment at the start of the recession. Last year, it was a paltry 3.5%.
Capital has gone on strike. What’s it doing instead?
“Talking heads are gushing over the piles of cash on corporate balance sheets,” grouses Dan Amoss this morning. “But how is this good for shareholder value? Since when have big corporations done intelligent things with cash?
“Most of the time, they haven’t. Instead, they overpay for their stock repurchases and overpay for acquisitions.”
And overpay the same folks who are making those decisions.
Right on cue, Standard & Poor’s reports that S&P 500 companies increased their stock buybacks during the second quarter by 221% compared to a year earlier — the fourth quarter in a row that buybacks have grown. 257 of the companies in the index — more than half — took part in buyback programs during Q2.
“No CEO wants to take the career risk of aggressively deploying capital when acquisition targets are dirt-cheap,” Dan surmises. Again on cue, there were a flurry of acquisition announcements just today…
- Wal-Mart is offering $4.3 billion for South Africa’s Massmart
- Anglo-Dutch conglomerate Unilever is buying Alberto-Culver, the maker of beauty products, for $3.7 billion
- Southwest Airlines will fork over $1.4 billion to buy AirTran.
“High corporate cash balances don’t reflect a healthy economy,” Dan asserts. “Companies that hoard cash aren’t expanding. If they’re not expanding, they’re not going to hire new employees.
“It doesn’t help that Congress made hiring more expensive with the health care law and countless other layers of bureaucratic red tape. Weighed against a mountain of debt and other liabilities — both on- and off-balance sheet liabilities — corporate cash balances are much less impressive.”
The second indication we’ve already begun another recession: M3 money supply.
M3 is the broadest possible measure of money in the system including cash, savings accounts, money market funds, etc. The Federal Reserve stopped tracking M3 in 2006 because they say they no longer find it useful.
John Williams of Shadowstats.com, however, has stayed on top of it, easily collecting the data needed to make this prognostication:
“M3 rising to the upside does not necessarily signal and economic upturn,” says Williams, explaining the lines on the graph above. “Yet whenever annual growth in M3 has turned negative, a recession always has followed, usually within six-nine months.”
Real M3 generated a signal in December 2009 for a downturn. How much time has elapsed? Oh, about nine months.
“The current weakness,” says John, “will eventually gain official recognition as the second down leg of a double-dip recession.”
“We are now at a state where,” Alan Greenspan said Friday, sounding almost lucid, “excluding World War II, we are in the worst shape of relationship between borrowing capacity and debt, I suspect, since 1791…
“We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk… In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem.
“Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious depression. And my basic — I said ‘depression.’ I meant recession.
“My problem, basically, is that economists can’t make these forecasts.”
Good thing we’re not economists, eh?