Last week, the S&P500 slumped over 5 percent, its second biggest loss in 2010. Volume rose, for the second week in a row, adding more validity to the price drop. The VIX (or fear) index also jumped up, confirming that investors were getting concerned about the direction of the equity markets.
Virtually all the economic data came in below expectations last week. Personal income disappointed. Consumer confidence plummeted. Chicago PMI slipped. ISM Manufacturing dropped. Initial jobless claims jumped up to 472,000–well above consensus estimates. Pending home sales for May plunged 30%, 15% below May 2009, and the biggest month-to-month drop on record. Nonfarm payrolls were weaker than expected, even after accounting for the census worker distortion. More ominously, average hourly earnings slipped and the average workweek BOTH slipped–these usually rise in a recovery. And factory orders dropped almost three times more than expected.
Technically, the cyclical bear market looks like it’s about to resume. Because the daily charts suggest that the S&P is somewhat oversold, prices are due for a short-term bounce. Prices can rise back up to 1,080 or even 1,100 without breaking the strong downtrend that began in late April. On the weekly charts, not only is the downtrend just now becoming firmly established, but the amount of downside still left is huge. And this makes more sense when one considers how much the S&P rocketed up after March 2009.
In the near future, the National Bureau of Economic Research (NBER) will have to decide when the recession that began in late 2007 ended, and if so, then will another contraction in economic growth be labelled as its own separate recession (the double dip) or will it become a new separate recession.
The blog Calculated Risk has done some interesting analysis to help understand how this decision might be made. The author reminds us that for a new separate recession to be named, most economic indicators must have returned to their previous highs. This happened in 1981, so that the recession that began later that year, was given its own separate label. Hence, the second recession became the double dip.
But what’s happening now? Specifically, have our economic indicators returned to the prior 2007 highs?
As the chart below (from Calculated Risk) shows, gross domestic product and gross domestic income (two most of the most important indicators of economic expansion or recession) have NOT returned to the 2007 highs.
This means that if the US economy starts to contract now, or later in the third quarter this year, then the “double dip” label would NOT apply.
Instead, the best way to describe the upcoming contraction would be to extend the length of the original Great Recession.
Some people could start describing the Great Recession, which started in 2007, as the recession from hell. It refuses to die.
If this slowdown picks up steam–as the markets and most economic reports are strongly suggesting it will–then for almost ALL living Americans, it will become the longest, and deepest, recession in our lifetime.