Higher Risk of Double Dipping

On one hand, imports into China have surged almost 44.7% from levels seen one year ago, while exports are up 45.7% but on the other hand, on-going troubles in Euro-zone and United Kingdom seems to have racked up spending its way through the global recession scenario. With the euro, the matter no matter longer concerns only one nation, but rather 16 countries simultaneously.

I am seeing the risks of a double-dip recession are rising, backed by a slew of poor economic data over the past two weeks, which lead me to believe that the US economy is heading for a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment actually suggesting a significant downside risk even to the anemic levels of growth and the US economy continues to face challenges in 2H2010, particularly as historic levels of fiscal stimulus fade – and appears far too close to the tipping point of a double-dip recession.

On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply and construction activity, both residential and commercial is falling sharply. Durable good orders are down, initial claims for unemployment benefits remain stubbornly high – way above the 400k mark. Real disposable income for 4Q has been revised downward while real disposable income before transfers for January was negative again. The manufacturing ISM index, while still expanding being above 50 – has now fallen a couple of notches and its production and new orders index levels are falling too and global PMIs suggests a loss of momentum in the global economy recovery. Real inventories look unchanged in 1Q relative to 4Q; auto sales were at best mediocre. Core CPI was falling and core PCE was closed to 0% suggesting anemic demand and economic weakness.

Along with the euro-zone crisis, in turn will be a drag on the potential for US export growth and the recent rally in the US dollar on risk aversion reflects this risk. Fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector – on top of private sector retrenchment – will remain. A similar retrenchment may well lie ahead in the UK, given rising fiscal sustainability concerns and the threat of a sterling crisis, contributing to the threat of a wider double-dip across high income countries.