Pragmatic Capitalism

Capital for Living a More Practical Life


Markets are soaring this morning after the housing starts data came in solidly higher.  Of course, the market is not the economy so let’s not get all wrapped up in one day of market swings, but the recent economic data has been resoundingly strong in the USA.  Regional PMI’s have been excellent.  Jobless claims are plummeting.  Housing data is clearly improving. Although things are by no means rosy, they’re also not dire.  Especially when one considers all the hurdles the economy has overcome in 2011.

Now, I’ve by no means been super optimistic, but the whole “double dip recession” thesis has, in my opinion, been off base for many reasons.  I’ve been calling the “double dip” calls misguided for a long time now and while it might be too early to pop the champagne, it’s looking increasingly likely that the U.S. economy is not double dipping.  I think this is largely based on misunderstanding the balance sheet recession.  Remember, we are in one long balance sheet recession that will remain a “muddle through” environment until the de-leveraging ends and/or government spending declines substantially and reveals the economy for what it really is.

I’ve estimated that the BSR could end as early as 2013/2014 so it would not be surprising to see some mild improvement as this will not be an event, but rather a process of improvement.  The largest contributing factor to this improvement continues to be the 10% budget deficit.  This is expected to continue into 2012 and will bolster the U.S. economy enormously.

As we head into Q4 it’s clear that there’s still no recession on the horizon as some estimates surge up to 4%.  ISI’s Ed Hyman bumped up his estimate this morning to 4% and the consensus GDP forecast is currently 3%.  Warren Mosler added some thoughts of his own in addition to one of his analyst’s Karim:

“It was pretty lonely forecasting those kinds of GDP numbers several months ago!

While the 8% budget deficit keeps it all muddling through at modest levels of growth, it’s still a far cry from being ‘acceptable’ in my book, as it’s just barely enough to reduce the output gap.

And letting FICA go up at year end or somehow paying for continuing the current level could trim quite a bit of Q1 aggregate demand.

Karim writes:

Even though the 9.3% rise in starts was led by a 25% gain in the volatile multi-family component, this still represents ‘news’ for GDP forecasts as most (including the Fed) did not assume any contribution to growth from this sector.

Some Q4 GDP estimates starting to move from 3.5% to 4%, and Q1 also now looks to be in the 3.5% area (assuming payroll tax cut is extended).

Although still likely, FOMC may have a lively debate on extending ‘conditional commitment’ beyond mid-2013.

I think the “muddle through” scenario is still on the table heading into 2012.  That means we’re likely to see growth, but below trend.  The economic environment will continue to feel like a recession even though we’re not technically in one.  That’s entirely due to the fact that we remain in a rare phenomenon known as a balance sheet recession.  And as long as the de-leveraging is offset by government spending which allows the private sector to repair balance sheets without crashing aggregate demand, we should continue slowly growing.  The biggest risks to this outlook remain government austerity or a meltdown in Europe/ China.  Thus far, neither of those events appear realistic.

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