Third quarter GDP came in at +2.5%. That was +2.5% higher than Benjamin Bernanke's prediction as he launched "Operation Twist," his latest brainchild for rescuing the economy. The figure would have been even higher except for an inventory contraction, which might have stemmed from the Fed Chairman's view itself. If inventories had stayed unchanged the September quarter GDP gain would have been +3.6%. The data are preliminary and could be revised. The basic message is unlikely to change, though. Modest expansion probably will persist into the December quarter, fueled by solid retail spending and the seasonal holiday push. Inventory re-stocking may provide additional impetus. Whether the uptrend will prove sustainable, or at least sustainable enough to justify the recent burst higher by the equity market, that's less certain.
Most economists now have dismissed the possibility of a Double Dip recession. Their complacency could be premature. Economic activity in the U.S. may have improved a little over the summer. But serious structural problems remain. Productivity has suddenly taken a turn for the worse. Output per worker rose sharply after the recession originally struck in 2008. For whatever reason the rate of improvement has hit the wall of late. If the trend keeps up that will put pressure on profits or wages, maybe both. Much of the latest improvement in consumer spending came from savings, not expanding income. External inflation is turning higher, as well. Petroleum supplies grew tight after the Energy Department ended its program of releasing strategic supplies into the market. And while the industry would love to expand drilling a thicket of government roadblocks remain in the way. Foreign producers scaled back over the summer as the government supplies flooded the market. The vaccuum is being filled but prices remain 20% higher. A wide range of other commodities are selling at elevated heights, too. For the moment investors may leave those markets alone and focus on stocks and bonds. Speculative money could shift over to commodities, though, amplifying the uptrend.
The combination of rising prices, lower personal income, and government austerity measures could stall the recovery all over again. Unemployment stands at 9.1% and threatens to increase. The Administration is attempting to pass a Jobs Bill to offset the spending cutbacks likely to emerge from the Super Committee later this month. That proposal resembles the "Single Wing Offense" that once ruled the day in the NFL but grew obsolete decades ago. Even if it were pass it wouldn't move the ball in today's economy.
A more pro-active game plan is needed. The details are negotiable. But a number of key elements are essential if 4%-6% GDP growth is going to be reestablished. That's the rate the country needs to lower the unemployment rate, boost personal incomes, create a more dynamic business environment, narrow if not eliminate the budget deficit, and keep inflationary pressures under control. Lower marginal taxes, less government regulation, greater personal freedom . . . . There's quite a list of things that could do the job. At this point it's largely a matter of competing foolishness in Washington, so gridlock might not be the worst thing in the world. Let's hope the politicians eventually take a page from the emerging growth companies we focus on here and concentrate their fire on new business formation and growth.
The Dow Jones Industrials are up nearly +15% over the last two months. We advised a fully invested posture back then, figuring the market's ultimate downside risk was -10% at most. That target hasn't changed. So today downside risk is more like -25%. And the day of reckoning hasn't moved, either. The basic variables are the same as before. Europe won't destroy its banking system. But it probably will slip into a recession as the recent bailout's austerity program kicks in. China continues to slow. And while the U.S. did enjoy a burst over the summer it's economy remains out of balance. Government stimulus is off the table due to the extreme debt load already in place. And a private sector stimulus isn't likely to happen due to political reasons.
A Double Dip recession could emerge in 2012. Our advice is to remain invested in core positions. Take advantage of the recent rally to accumulate a cash reserve to use in the future.
Walter Ramsley
Executive Editor
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