Don't look now, but the leading indicators continue to paint a double-dip picture. From David Rosenberg:
The smoothed ECRI leading economic index for the U.S. fell last week for the 12th week in a row, to stand at its lowest level since July 2009. Something tells us a slowdown is about to start. With a week to go before the debate with the legendary Jim Grant at the Plaza in New York, we seem to recall that this was the index he was using several months ago to predict that nominal GDP growth was set to accelerate to a double-digit annual rate. We seem to have stopped well short of that mark.
We too marvelled at the 5.9% annual rate real GDP growth performance in Q4, though it should not be lost on anyone that nearly all the growth came in two non-recurring items — inventories and capital spending (the former is a temporary alignment of stocks with sales and the latter is a late-year rush to take advantage of some tax goodies). The rest of the economy actually slowed to less than a 1% annual rate last quarter. This is actually encouraging to those who see a big slowdown coming, or even a double dip.
Here’s why: We looked the 60-year history of the quarterly GDP data and broke the numbers into two subsets. The first set included business expansions that lasted more than 12 quarters (these cycles were: 1961-1969, 1975-1979, 1983-1990, 1991-2000, 2001-2007). And the second included expansions that were 12 quarters or less (1950-1953, 1954-1957, 1958-1960, 1971-1973, 1980-1981). The results are quite different.
If we expect to undergo another long economic expansion (average of 30 quarters) then we are not likely to see the peak in growth until the 13th quarter, when on average real GDP was running at a 7% annual rate. But if this turns out to be a short economic expansion (12 quarters or less) then the peak in growth happens in the first and second quarter of expansion. And that is exactly what seems to have happened this time around.
In other words, when the quarterly peak in growth happens this early — the second quarter of expansion this time around — then it usually signals a high chance of this being a truncated expansion; and we are seeing signs of this in the ECRI leading index too. This all augurs quite well for defensive, not cyclical strategies and buying insurance right now to protect any long portfolios is dirt cheap with the VIX index sitting at 17.