Where is the Recovery? Part 2

Where is the recovery? Part 2  

Gold bears have been pounding gold on the short side because they think the US economy is in, or will soon be in, a strong recovery which means the Fed will raise rates, the dollar will soar and gold will decline further. But the data does not confirm a recovery. We believe the gold bear premise is fundamentally wrong.

Last week's Q2 estimate of US GDP at $16.2 trillion represents just a 1.0% annualized rate of gain from the $15.0 trillion level posted seven-and-one half years ago at the pre-crisis peak in Q4 2007. There is no other 30-quarter business cycle expansion that feeble since World War II. And even that anemic number requires you to believe that the 1.5% per year implicit price deflator used to calculate real GDP accurately measures inflation.

But let's keep this as simple as possible. GDP is a complicated number for measuring economic performance since it includes inventories, exports and all kinds of moving parts and seasonal adjustments. Real (after inflation) Final Sales gets rid of this stuff and focuses only on the domestic economy. The numbers highlight just how weak the recovery has been in the 30-quarter period following the 2008 recession.

Compare current performance to previous 30-quarter business cycle expansions. After the dotcom peak in Q2 2000, Real Final Sales grew at a 2.1% annual rate through 2007. During the 30-quarters after the mid-1990 peak, Real Final Sales rose at a 3.0% annual rate. During the equivalent period after the Q2 1981 peak in the Reagan era, Real Final Sales expanded at a 3.5% rate. The trend is down and the current weakness is unprecedented in the post war period.  How long will it take for the markets to see reality? Not long now, in our opinion.

CAGR=Compound Annual Growth Rate

Source: David Stockman, http://davidstockmanscontracorner.com/, July 31, 2015.

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