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David Rosenberg

Muddling through: Don't count out a double dip just yet Add to ...

As the United States heads into mid-term elections, it's time to admit the truth. The country has delayed but not derailed a double-dip recession. The recovery is extremely fragile and unless there is an improvement in final sales, all it would take would be a modest inventory drawdown to pull the economy back into contraction.

U.S. GDP expanded at a 2-per-cent annual rate in the third quarter in what is turning out to be a classic case of a muddle-through economy. Growth is inching ahead, but not at a fast enough pace to have any meaningful impact on unemployment.

To be sure, 2-per-cent growth is fractionally better than the 1.7-per-cent pace posted in the second quarter when double-dip risks began to surface. But while a plus sign in front of any GDP number may be viewed as positive in some circles, the pace of recovery is anemic for this stage of the cycle and decelerating from the first quarter.

History indicates it is completely abnormal to be seeing the economy this weak heading into the second year of a recovery. At this point of the business cycle, on average, real GDP growth is typically accelerating at 5 per cent a year, not 2 per cent.

The major problem in the third-quarter report was the split between inventories and real final sales. About 70 per cent of the economy's growth came from businesses rebuilding their inventories, not from actual sales to consumers. If inventory investment slows in the fourth quarter, as I anticipate, GDP growth could easily slide into negative terrain.

It would have been much more encouraging to see real final sales do better than the tepid 0.6-per-cent annual rate gain that was posted. The most recent number follows a string of exceptionally weak performances.

Historians will note that this goes down as the weakest recovery in real final sales on record, despite the fact the economy has been on the receiving end of the most pronounced dose of fiscal, monetary and bailout stimulus on record. Quite an accomplishment.

The recession may have technically ended, but outside of inventories, this has been a listless recovery. Real final sales are just a shock away from double-dipping - and that shock could come from looming tax hikes, accelerating fiscal cutbacks by states or local government, or the millions of unemployed about to fall off the extended jobless benefit rolls at the end of November.

The good news was that consumer spending did accelerate to a 2.6-per-cent annual rate gain from 2.2 per cent in the second quarter - the best performance since the fourth quarter of 2006. Commercial construction also eked out a 3.8-per-cent annualized gain, the first advance since the second quarter of 2008. But the good news pretty well stopped there.

Capital spending came in at a decent annual rate gain of 12 per cent, but the momentum is clearly receding after the 20-per-cent-plus growth rates of the prior two quarters. Residential construction collapsed at a 29.1-per-cent annual rate in response to the expiry of the home buyers' tax credits, the steepest decline since the first quarter of 2009, and there appears to be little recovery in sight.

It was no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5-per-cent annual rate trend - half the pace we saw in the first half of the year. Weren't the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2 per cent - the fourth decline in the past five quarters. At a 12-per-cent share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a drag on the economy as far as the eye can see. A double-dip recession still looms as a real possibility.

 

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