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Tuesday, July 27, 2010

2nd Half Slowdown Update

by Calculated Risk on 7/27/2010 01:25:00 PM

"For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent. I actually expect it."
Professor Robert Shiller, July 27, 2010 (via Reuters: Chance of Double-Dip US Recession is High: Shiller)
Now that the 2nd half slowdown is here, it might be worth reviewing some of the arguments for a slowdown:

1) less Federal stimulus spending in the 2nd half of 2010.

The only additional stimulus has been the extension of the qualifying dates for unemployment benefits. Even with this extension, the overall stimulus peaked in Q2 or possibly Q3.

2) the end of the inventory correction.

This is pretty clear in the data, and we are seeing a slowdown in growth for the manufacturing sector (but not contraction). This is one of the reasons I'm tracking the regional manufacturing surveys so closely this week.

3) more household saving leading to slower growth in personal consumption expenditures.

This still isn't clear, although the personal saving rate ticked up in May.

4) another downturn in housing (lower prices, less residential investment).

It is clear that residential investment will be a drag on GDP in Q3. As far as prices, the declining prices will not show up until the September reports - or possibly the October reports (released with a significant lag). So this still seems correct, especially with the existing home months-of-supply in double digits. Diana Olick at CNBC quoted NAR chief economist Lawrence Yun:
Even the always glass-is-half-full chief economist Lawrence Yun made clear several times in the briefing before the report's release, that he expects home prices to come under significant pressure over the coming months, as inventories rise.
Inventories will surpass ten months," says Yun. "If sustained, prices will surely be under pressure." Yun added that he originally expected the drag after the tax credit expiration to last about two months; he's now pushing that forecast to three to four months.
Usually Yun is too optimistic.

5) slowdown in China and Europe and

Growth in China has slowed, from the WSJ:
China's central bank struck a confident note Tuesday, saying the country's current economic slowdown is beneficial for long-term sustainable growth, and there is little risk of a "double-dip" recession.

"Although economic growth is showing signs of slowing down, China's current economic fundamentals are still very good. While a further slowdown and stabilization of growth is likely, the possibility of a double-dip is low," the People's Bank of China said in a quarterly report on the economy's performance.
6) cutbacks at the state and local level.

This is starting to happen, and I expect the number of layoffs to increase later this year.

I still think we will avoid a technical double dip recession, but that won't matter to the people impacted by the slowdown.

Note: if the economy does slide into a recession, it will probably be consider a continuation of the recession that started in December 2007, see: Recession Dating and a "Double Dip"