US: Double Dip Data Distortions
While the outlook for the US economy has clearly worsened in recent months, an unfortunate confluence of circumstances has added to the fear of a double dip. Three temporary factors made the recovery look stronger around the turn-of-the-year (4Q2009/1Q2010), but are now fuelling double dip fears, as they show up in the series of negative economic data.
In the first place, inventory rebuilding boosted GDP growth by 2.8 percentage points in 4Q2009 and 2.6 in 1Q2010. However, in 2Q2010 the contribution of inventories to GDP growth dropped to 0.6 percentage points. The fading inventory cycle has been reflected in the GDP growth slowdown from 5.0 per cent in 4Q2009, to 3.7 per cent in 1Q2010 and 1.6 per cent in 2Q2010. In fact, if we exclude inventories, GDP growth peaked at 2.2 per cent in 4Q2009 and has been relatively stable around 1 per cent in first and second quarters in 2010.
Secondly, labour market data have been distorted by temporary government jobs for the decennial US census. Temporary work- ers were hired in January-May 2010 and then laid off.
Consequently, non-farm payrolls grew substantially in the first five months of 2010, and then contracted. But private sector payrolls continued to grow in June and July. In fact, the modest employment growth in the private sector is still comparable to the ‘jobless’ recoveries after the recessions of 1990-91 and 2001.
Thirdly, the first time home-buyer tax credit has created an artifi- cial double dip in home sales. Potential home-buyers shifted their home purchase into the tax credit period, but after the tax expired, home sales plunged.
A slow and fragile recovery
However, if we look through these double dip data distortions, we still see a sluggish economy. The housing market would probably have moved sideways, if it had not been for the tax credit. Excess supply in the housing market has risen again, to an important extent due to foreclosures. Therefore, the housing market is likely to remain a drag on the economy for some time. Meanwhile, consumers are still deleveraging. After accumulat- ing a mountain of debt between 1994 and 2008, consumers have been successful in reducing their ratio of financial obliga- tions to disposable income. However, at the current pace, the deleveraging process may last until the end of 2011.
While this adjustment is crucial in finding a more balanced growth path for the US economy, it does imply that consumer spending can only grow at a modest rate for the time being. The strength of the economy currently lies in the business sector, which has become ‘lean and mean’ after slashing 8.4 million jobs in 2008-2009. Firms are renewing and expanding their physical capital stock and have replenished their inventories. They have also benefited from the recovery in world trade. How- ever, similar to the two previous recoveries, businesses have been reluctant to start hiring after the recession. Instead, we have seen a rise in labour productivity, as firms try to squeeze as much out of their current workforce as possible. The main downside risk at the moment is that the fear of a double dip might postpone new hiring by the business sector. That would further undermine consumer spending and could in the worst case scenario – this is not our baseline scenario – cause a second recession. To a considerable extent, a double dip would be a ‘self-fulfilling prophecy’.
