21 October 2010

The US economy: no double dip! Long equities

Whilst the double-dip theory is waning these days, I thought it would be good to review a few economic indicators that cry that no double-dip is to be expected (but for economic/monetary mistake or exogenous shock).
First, the output gap turned around and whilst still negative is not pointing to a downward tipping point. The graph below clearly shows that employment is lagging the output gap indicator. In addition unemployment peaked four months after the recession ended, which is rather short compared to 1991 and 2001 recessions where the numbers were 15 and 19 months respectively vs. 1 month for 1981 recession: it seems that the deeper the recession the shorter the recovery time (that does not say anything about the magnitude of the improvement and unemployment is still very high by US standards).
Second, retail sales have also strongly rebounded and continue to forge ahead. We are back to April 2007 and September 2008 levels.

Third, despite a high unemployment rate, individuals have largely repaired their balance sheet to levels not seen since 2000 and the 1985-1990 period. I am convinced that the debt service payment/disposable personal income ratio will shrink further however that will weigh on GDP growth but make the economy much sounder longer term. In the meantime, the savings rate has stabilized in the 6% area.

Finally, we also analyzed US federal tax receipts from the 2006 tax year (ending in September) which present an online view of the real state of the US economy, since data are provided each week. The graph below plots monthly taxes received from individuals, corporations, excise and all contributors compared to the previous year.

Data clearly point towards an improving economy since February-April 2009; this corresponds to the trough of equity markets in the Western world in March 2009. The dramatic improvement in corporation taxes paid (+20% for the 2010 tax year) show that the economy definitely turned around whilst taxes paid by individual are still sluggish but have gained traction for a year now.
Excise taxes are as close as we can get for the exact picture of the economy: they improved a lot late last year and are now in a consolidation phase but nowhere near a double dip. It is worth noting the correlation between tipping point of the excise tax collection amelioration with the stock market trough in March 2009 and the sluggishness of 2010.
All the above lead me to think me that equity markets should at worse do alright at least to the end of the year.
US Treasury: Financial Management Service
Federal Reserve Bank of St. Louis: Economic Research