Friday, September 2, 2016

Société Générale's Albert Edwards Sees Blue Skies, Sunshine, the Lame Shall Walk Again

Of course it's possible I have misinterpreted the meaning of:
"the US economy is on crutches, and they are about to be kicked away"
From ZeroHedge:
One month ago, when the first Q2 GDP estimate was released, we reported that if one strips away the consumer part of the economy, the US was already in a recession.
Overnight, In his latest letter SocGen's Albert Edwards picks up on this topic, but first dispenses with the usual warning, saying that "the US economy is on crutches, and they are about to be kicked away" adding that "US economic growth is weak yet the labour market is tight. This juxtaposition is keeping the Fed in a quandary on whether to raise interest rates. As it stands it probably will, or will not, depending on which way the wind (data) is blowing that day!"

After the requisite "flip-flop Fed watching", Albert then proceeds to agree with what we said recently, namely that "the only thing keeping the US out of recession is the US consumer (see chart below). It is difficult to say consumption is driving the economy forward - rather it is like a woodwormridden crutch creaking under the strain of holding up a deadweight economy. This recovery ? the fourth longest in history - is surely nearing its end."
While so far the consumer remains resilient, and in fact in the second quarter, US personal spending unexpectedly soared to near cycle highs just as the rest of the economy dipped in a recession...
... this pace of consumption, of which Obamacare has been a significant recipient, will hardly sustain itself. According to Edwards, his "hypothesis that a US profits recession will lead to a collapse in business investment and take the economy into recession seems to be playing out. If consumption stalls then we really are in trouble, for the next devastating phase of the secular valuation bear market in equities will kick in ? much to the shock of both investors and the Fed."

But before we drill down into the consumer part, first a quick look into why the SocGen strategist so confident that the non-consumer part of the economy is about to tap out. For that, he present the following historical parallel:

The year 1986 has been the only case where a business investment recession did not cause an outright US GDP recession. Why? Because the economy had recently emerged from 1982 recession and it was growing very strongly indeed when the hit to capital spending came. In addition, households were leveraging up aggressively, which boosted consumer spending. Neither of these things is the case now. Indeed the current consumer/GDP conjuncture has echoes of Q1 2007 (circled in the chart below), when robust consumption only temporarily offset extreme weakness in the data elsewhere. But within six months, by November 2007, the NBER recorded that the economy had fallen into outright recession...