Tuesday, July 13, 2010

Double-Dip Or Not?

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Just 16 months ago we were looking at the financial abyss, a depression and most economists agree that the recession ended about a year ago. But what has been the headline news of late, has been talk of a 'double-dip' recession. Not to say it isn't possible, but the way the media presents it, appears like it's a common day event. Fact...there have only been 3, out of the 38 recessions since 1880, which qualify as double-dips.
So if this isn't a double dip what is it? Some say it is a 'soft-spot' in the economy, but a double dip, well someone better tell Alcoa, Intel & Chevron who beat consensus earnings estimates.

In a recent Barron's report, According to a model developed by Credit Suisse, there's scant possibility of a relapse into a recession. >>LINK

A FACTIVA SEARCH REVEALS A RECENT RISE in the use of the phrase "double dip"—a relapse into recession—in media stories on the economy. So it's reassuring that a systematic look at lead-ups into past recessions puts the six-month probability of a double dip at approximately zero.
Model is comprised of:

~Real Fed Funds Rate (level)
~S&P 500 (6-month % change)
~Private Non-farm Payroll Growth (6-month % change)
~Single-Family Housing Permits (6-month % change)
~University of Michigan Consumer Expectations Index (6-month % change)
~Initial Jobless Claims (YoY% change)
~“TED” Spread (spread between 3-month LIBOR and 3-month T-bill yields)
~Relative Price of Energy (deviation from trend)
 see chart below

Dating back to 1964, the model has registered only one false signal which occurred in 1984.
Bottom line, the NBER Credit Suisse model indicates a zero probability of another recession. Yet, over the past few months, the stock market has been focused by the possibility of a “double dip.”

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