Double Dip? Seven Reasons Why NotLocation: Washington, DC It seems these days that half the headlines in the financial media fear a double-dip recession, as do half the conversations on Wall Street. There certainly are risks, not least in Europe’s financial difficulties. But still, there are reasons to question such widespread concerns. History, after all, offers only one true double-dip experience, and that grew out of a policy error. More, the actual data on the economy fly in the face of such an outlook. Following are seven reasons to doubt the double-dip outlook. 1. The Consumer Seems Firm Enough More telling fundamentally, household income has risen sufficiently enough to support future spending. Overall personal income rose at an annual rate of 5.4% annual last May (the most recent month for which data are available), actually accelerating from the 4.4% annualized rate of advance during the prior six months. Meanwhile, the personal savings rate, at 4.0% of after-tax income, generates a $454 billion annual flow of new money from which households can pay down debt even as they maintain existing levels of spending. If income continues to expand, as is likely, households will have the wherewithal to continue that “de-leveraging,” even as they increase spending. All they need do is keep outlays from growing faster than income—a circumstance that should easily support at least moderate spending growth. 2. Housing Data Are Misleading on Two Sides Thus, as the first expiration of the credit approached last November 2009, many who were otherwise looking for a new home crowded their purchases into the eligible period. Not surprisingly, home buying surged in October and November. But since many of these hurried sales would have otherwise occurred in December, January, and February, new purchases in those months dropped by more than 12%. Something even more extreme occurred as this latest expiration date approached in April 2010. People who were looking crowded their purchases into March and April in order to qualify for the credit, driving up home sales by almost 30%. Then, because so many of those sales would have occurred after April, recorded sales fell suddenly by about 30% in May. Housing starts and residential construction put in place followed this same up-and-down pattern. But none of this says anything fundamental about the housing market. There, the more significant consideration is the drop in the inventory of unsold homes by 27%; in fact, during the last 12 months, from the equivalent of 13 months’ supply during the 2008–2009 crisis to about eight months’ supply more recently. This development fundamentally has lifted previous downward pressure on new construction, sales, and pricing. According to the National Association of Realtors, for instance, the median sales price of homes sold in the United States has risen 5.3% so far this year, and prices continued to rise in May. It will be a long while before residential real estate becomes a good investment, but the price pattern nonetheless suggests that the market has easily compensated for the gyrations surrounding the tax credit. 3. Business Spending and Exports Are Awfully Strong for a Dip Meanwhile, business also has begun to rebuild inventories, presumably in anticipation of future sales growth. Stocks of finished goods on hand rose at a 6.0% annual rate between March and May (the latest month for which data are available), and work in progress increased at a 4.3% annual rate. Exports also showed strength. So far this year, through April (the latest month for which data are available), total U.S. exports to the rest of the world have expanded at an impressive annual rate of almost 17%. In April, they jumped at a 12.7% annual rate. That kind of growth will not only help spur the overall U.S. economy but it also argues that the world economy is far more robust than double-dip arguments suggest. As a take on domestic U.S. demand, it is noteworthy that imports have expanded at a 23.5% annual rate so far this year, a pace they held in April. Clearly, someone in this economy is buying. 4. Overall Production Levels Look Fairly Good, Too 5. Employment Does Not Look Threatening, Either 6. Financial Markets Are Healthier Than the Headlines Imply 7. China Continues to Grow But though all these factors are real and will slow China’s general economic growth rate, it would be a mistake to exaggerate them. China’s decline in residential real estate prices hardly risks the financial collapse that occurred in the United States about a year and a half to two years ago. For one, debt levels in China are much lower than they were or are here. While Chinese households on average are carrying debt equal to about 40% of income, American debt levels approach 120–130% of income. For another, Chinese typically put 50% down for a home purchase and almost never less than 20%. Neither will the yuan’s increase impact exports very much. The currency appreciation is so slight and so carefully managed that it is more cosmetic than real. It is certainly insufficient to threaten Chinese exports. Broad economic indicators also show a slowdown, not a decline. The PMI, for instance, dropped from 53.9% in April to 52.1% in May, but still anything above 50% is expansion. If, as expected, China’s overall growth slows for an 11.9% annual rate in the first quarter, to 9.5%, it will still remain faster than the rest of the world—and hardly the stuff of which double dips are made. 1The Purchasing Managers Index (PMI) is a
composite index that is based on five major indicators including: new
orders, inventory levels, production, supplier deliveries, and the
employment environment. Each indicator has a different weight and the
data is adjusted for seasonal factors. Milton Ezrati, Partner and Senior Economist and Market Strategist, has been widely published in a wide variety of magazines, scholarly journals, and newspapers, including The New York Times, Financial Times, The Wall Street Journal, The Christian Science Monitor, and Foreign Affairs, on a broad spectrum of investment management topics. Prior to joining Lord Abbett, Mr. Ezrati was Senior Vice President and head of investing in the Americas for Nomura Asset Management, where he helped direct investment strategies for both equity and fixed-income investment management. The opinions in the preceding economic commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general. Nor is it intended to predict or depict performance of any investment. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Consult a financial advisor on the strategy best for you. Investors should carefully consider the investment objectives, risks charges and expenses of the Lord Abbett funds. This and other important information is contained in a fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional, Lord Abbett Distributor LLC at (888) 522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.
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