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David RosenbergFred Lum/The Globe and Mail

I have said time and again that the three most dangerous things an investor can do are: to ignore the primary trend, which is one of deflation; to dismiss the new paradigm, which is a secular credit contraction; and to fail to differentiate between an organic economic recovery and one that is artificial - a dangerous temptation today as relentless government intervention gives rise to what is, at best, a statistical mirage.

Last week , I described how every penny of the Canadian recovery owes thanks to the collective support of the Department of Finance, Canada Mortgage and Housing Corp., and the Bank of Canada in underpinning a housing rebound that is looking bubbly with each and every passing day. In the United States, the economic skew from government intervention is equally acute.

While many economists will undoubtedly rejoice over the strongest U.S. headline gross domestic product results in six years, the first-quarter number actually came in a tad light, relative to expectations. It was also a very mixed performance, from a sector standpoint. Real GDP in the United States expanded at a 3.2-per-cent annual rate versus the 3.4-per-cent rate that the consensus had penned in, and once again, the mathematics of a renewed inventory build was responsible for half the GDP growth last quarter.

No doubt the consumer was in a better buying mood in the first quarter, with spending rising at a 3.6-per-cent annual rate, but if truth be told, if not for the drawdown in the savings rate (to 3.1 per cent from 3.9 per cent) household expenditures would have barely exceeded a 2.5-per-cent annualized pace. The savings drawdown, along with the fact that real personal income, excluding government transfers, basically stagnated in the first quarter, makes me think this rebound in consumer spending growth was more of a blip than a sustainable trend.


We may have a statistical recovery on our hands, but it is extremely anemic when benchmarked against the amount of pro-cyclical government assistance ranging from bailouts, to a microscopic policy rate, to a $1.4-trillion (U.S.) fiscal deficit, to a pregnant $2.3-trillion U.S. Federal Reserve Board balance sheet.

If this were a normal, garden-variety cycle, as opposed to a period of unrelenting private-sector credit contraction, the various federal government interventions would have already triggered a rebound in real final sales growth to about a 3.5-per-cent annual rate. Instead, real final sales (GDP less inventories) have only managed to eke out gains of 1.5 per cent, 1.7 per cent and 1.6 per cent in each of the past three quarters. On this basis, this post-recession recovery goes down as one of the weakest in the 60-year-plus history of the data series.

An Investor's Guide to Understanding the Economy by Gary Rabbior:

  • Part 1: How the money in the economy is managed
  • Part 2: How inflation works
  • Part 3: Avoiding the deflationary spiral
  • Part 4: How much money is too much money?
  • Part 5: How markets and currencies work
  • Part 6: How interest rates affect your investments

Not only that, but it is completely abnormal for the U.S. economy to still be running at a level below the prerecession peak at this stage of the cycle. Normally, nine quarters after the onset of a downturn, the level of real GDP is not only hitting a new high, but 12 per cent above the previous cycle high. Here we are today, nine quarters after the onset of the Great Recession and despite all the king's horses and all the king's men, the Humpty Dumpty economy is still 1 per cent lower today that it was in the fourth quarter of 2007.

I won't deny that we have a statistical recovery on our hands in the United States - after all, if the economy was not managing to expand at all with the massive policy stimulus in the system, then that would truly be a disaster. But we ran some simulations and found that if you remove the monetary and fiscal stimulus in the system from the equation, real GDP growth would have come in at the oh-so-lofty rate of 0.7 per cent annualized in the first quarter - versus the posted 3.2-per-cent advance.

So, one can say the stimulus is working in keeping the economy above water; however, I would say that the recovery lacks the same organic vigour we saw in that failed recovery and risk-asset rally in the opening months of 2002.

David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

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