The economy remains in a climate with a very weak recovery.  There is still some good news though.  All of the recent calls for a “double dip recession” grew too loud and are now being somewhat muted.  It really looks as though the chances of a double dip recession are coming down.  There are two key things to reconsider about the next recession coming upon us immediately.  First is that the term “double-dip” actually no longer applies because we have been in recovery mode for too long.  Second, and much more important, is that this recession everyone was so scared about is looking like it won’t be coming to America after all.

Is the world suddenly fixed? No. Are there still problems? Very much so. Will unemployment and housing suddenly recover? No. Still, the current barometer is showing that a recession is not yet likely going to come to the United States.  We have broken down ten key factors that signal how we may have luckily avoided the next recession: GDP, stocks, corporate earnings and dividends, interest rates, commodities and inflation, consumer spending, China and India, Europe, economist predictions, and the election cycle.

GDP, Gross Domestic Product

The U.S. Gross Domestic Product was far from any great or massive growth.  Regardless of what anyone says about GDP, this is the true barometer for whether or not we are in or entering into a recession.  For the third quarter, that preliminary reading was +2.5% and even the price component via the PCE Price Index was +2.4%.  Celebrating 2.5% growth might be a bit like taking a teenager to celebrate a birthday with any gift they want, in the dollar store.  Still, this is not anywhere close to a recession.  It is up from the readings of +1.3% GDP in the second quarter and versus +0.4% in the first quarter.  The caveat: anything under 3% GDP growth will not really lend to a great recovery and it is certainly not going to act to help housing prices nor the constantly weak jobs market.

Stocks

October of 2011 is turning out to be a phenomenal month.  This may be the best in a generation.  Not only did the DJIA get back above 12,000 after the E.U. stabilization and Greek debt haircut but this is up from the low of just under 10,400 for better than a 16% gain from the low.  This also happened during earnings season and we have witnessed the CBOE Volatility Index (The fear index) drop from a peak of above 45 down to almost 25, showing that the fear is drying up.  And the best news is that Apple Inc. (NASDAQ: AAPL) was only up about 5% so the market itself broadly outperformed Wall Street’s favorite darling.  You cannot have an infrastructure recovery without Caterpillar Inc. (NYSE: CAT) and its stock has risen a whopping 37% from the first day of October.  The two DJIA banks of J.P. Morgan Chase & Co. (NYSE: JPM) and Bank of America Corporation (NYSE: BAC) are both up just over 30% each from the first day of October.  Even a bear market bounce would not be this big if a recession was imminent.  The caveat: even a remedial chartist and a cocktail napkin chartist can recognize that stocks over the last three weeks have moved from very oversold to extremely overbought.

Corporate Earnings & Dividends

This latest earnings season has included very little great upside surprises.  Many companies issued guidance that was far from stellar.  The good news is that if you look at the guidance that started it off from Alcoa Inc. (NYSE: AA) it signals a choppy economy rather than an outright recession.  3M Co. (NYSE: MMM) was the only real disappointment among the big conglomerate stocks and that is a huge relief indicator that earnings are not likely to implode during the fourth quarter.  The war of dividends is still entirely in favor of the shareholders.  We saw 8 dividend hikes one day this last week alone and major companies are still using their cash to boost their payouts and to repurchase common stock.  The caveat: the U.S. dollar could play an issue again and also the earnings growth is slowing down and looking very choppy from company to company and sector to  sector.

Interest Rates

Ben Bernanke has said that interest rates are likely to remain exceptionally low through mid-2013.  We have gone from near-record low yields during the end of September and early October to slightly higher yields.  This signals more of a recovery or at least a lower likelihood of a serious deterioration.  The 10-year Treasury yield has gone from 1.78% at the start of October up to nearly 2.40% already.  The 30-year Treasury yield rose from 2.76% at the start of October up to almost 3.45%.  Those are still extremely low interest rates, but that is a rise of over 0.60% in the 10-year and a rise of almost 0.70% on the Long Bond.  There is a belief among equity traders that bond traders often get it right in direction, and if so then the bond traders are saying the same thing that equity traders are saying: maybe no massive recovery but certainly not a recession.  The caveat: interest rates are already so low that even lower rates might not matter if there are far lower growth opportunities.

Commodities & Inflation

Gold is now trading more and more like a core asset class or a rather than the fear asset or the hyperinflationary asset like we saw for much of the 2010 and 2011 period.  This week brough a huge move higher in WTI crude oil to well above $90.00 to nearly $94.00.  Still, there is a large buffer between that and $100.00 where investors, speculators, economists, and business owners start screaming about inflation.  The true CPI reading has a lag, but September came in at only 0.3% even though the year-over-year reading was at a higher pace.  The core-CPI, eliminating food and energy, is running slower even if Producer Prices were up.  The insulation remains that businesses have always had a hard time passing on higher prices to customers because the customers either can put a purchase off or they will comparison shop for a lower price.  The caveat: The Eurozone EFSF is similar to QE2 and similar to TARP in the outcome, and that may mean the Euro printing presses can bring back some inflation ahead.

Consumer Spending

What is so interesting is that very recent consumer confidence data hit a new near-term low in October.  That may have been the low-confidence trough now that the European situation and now the stock market have both improved handily.  We’ll know the answer to that in another two or three weeks when more recent data measuring consumer confidence is released.  FedEx Corporation (NYSE: FDX) is looking to add workers for an extremely busy holiday season.  The high-end retail market is lined up for a holiday sales boost of you trust what some retailers are saying, but earlier in October came word that holiday sales growth is going to be about half of the growth seen in 2010. This is still “growth.” The good news around unemployment is that the October data from the National Association for Business Economics showed that there are still more companies looking to add jobs than to cut them. The caveat: Housing data shows continued home price weakness prevailing and a serious lack of employment growth and a 9% and higher unemployment rate may be the new normal.  Those should both keep growth rates lower than many would like to see.

China & India

A key challenge of 2011 has been that the two great emerging markets of China and India have been out of the global growth mode.  As the “Chindia” populations and their related neighbors easily account for 2.5 billion people, it has been a drag on commodity prices, heavy equipment sales, and a drag on global transportation players.  China was putting off everything it could and it has been raising rates.  The good news is that a soft landing seems to have been engineered as the growth rate slowed down to 9.1% in the third quarter after having been 9.5% in Q2 and 9.7% in Q1.  Imagine a soft economy with “only 9.1% growth.  India has also been a growth destroyer as the nation has been hiking rates to curb inflation.  India’s second quarter growth was still 7.7% for GDP, its lowest rate of the five prior quarters.  Here is the good news: in recent days there have been indications that both nations have decided to halt the tightening measures and the countries will go to more of a neutral bias.  It is not exactly as robust as many have seen in the past, but it is no longer a choke-hold.  The caveat: with each nation, how will you ever know exactly what is economic reality versus rhetoric?

Europe

Europe has been suffering from the woes of Portugal, Ireland, Italy, Greece, and Spain, hence The PIIGS.  What a name!  The central banks of France and Germany are the leaders by far and they have been too slow to act.  The European Central Bank has been in denial.  The good news is that the latest economic and equity market recovery has been because the Europeans finally pulled their heads out of the sand (or out of somewhere else) and jumped on board.  The European Financial Stability Fund, the EFSF, is similar to a quantitative easing or to a TARP of America.  The tally could be as much as $1.4 trillion dollars.  The Europeans have also agreed on a 50% haircut to the Greek debt prices.  It is as if finally in a short three-week period that the Europeans woke up from the fog and realized they had to put in a huge financial backstop.  The caveat: The woes of the other PIIGS nations have not gone away, and Italy is likely to continue being a serious problem based on debt-to-GDP ratios and over interest rate spreads.

Economists & Analysts Leaning Away From Recession

It was during late-July, August, and September that the growth models from analysts and economists (and traders) that Q3 growth and Q4 growth were going down.  It appears that they all overshot to the downside and the trend before the U.S. Q3 GDP report was to slightly ratchet the estimates higher.  Growth is anemic, but it is not in the red officially.  UBS had recently raised the third quarter GDP target to +2.6% from +2.0% well over a week before the GDP data was released.  The firm has a +2.0% projection for the fourth quarter.  Bridgewater’s Ray Dalio (a prominent hedge fund) told an Economist conference on Thursday that there is a 30% chance of another downturn as we are close to zero growth in the U.S. and Europe.  There is some good news there: that still implies a 70% chance that we won’t have another major downturn.  Dalio noted “only 2% growth for the next few quarters.”  Again, still not in the red. A strategist at Morgan Stanley noted closer to 3.0% growth in the fourth quarter as being likely.  The first “we’ll get through it OK” call was a month ago near the peak of the panic selling that a Russell Investments survey was calling for no double dip recession. Even Warren Buffett of Berkshire Hathaway Inc. (NYSEL BRK-A) still maintains that a recession will likely be avoided.  The caveat: this is still very slow growth and there are so many spotty patches in the economy that many can still maintain that the recovery is not much of a recovery.

Election Cycle

Many investors like to believe that election years are supposed to be good for the stock market, and therefore for the economy as well. Intrade, the prediction market, has been showing just under a 50% chance of an Obama re-election, but that is currently right at 50%. Washington D.C. is a mess right now and it is still not a determined race as far as who will be the candidate on the right.  The caveat is a double caveat: We would argue that the most recent example of 2008 was very much wrong with a drop of 13,000 to 8,000 in the DJIA during the financial meltdown.  The parties are also in what has to be an all-time low of cooperation and the term “gridlock” is a total understatement right now. 

******

The end game is that the U.S. appears to have avoided a recession.  This is not going to suddenly turn into robust growth.  Many major problems exist.  The age of austerity is upon us and this is likely to keep robust government spending at lower rates than even the recent past. As far as how the growth may feel, the punishment is going to feel like a child who is grounded but who can still play with his friends at home.  It is still looking far better than being locked up and not allowed to do anything.  Stay tuned… We are still in for some very choppy news ahead.

JON C. OGG

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