From the excellent RBC Capital Markets Investment Strategy team.
This leads us to thoughts about an empirical regularity seen in the GDP data since WWII. Following a line of inquiry recently undertaken by researchers at the Atlanta Fed, we plotted the cumulative GDP downturn against the size of the subsequent one-year GDP recovery surrounding each recession since 1948 (Exhibit 6). The red dots in this chart represent the expected cumulative GDP downturn during this current recession plotted alongside the year-ahead recovery in the view of both the Federal Reserve and the Consensus Economics community. What is abundantly clear from the analysis is the fact that larger growth busts have been typically followed by stronger growth expansions.
The mechanics behind this coiled spring response for GDP growth have less to do with the consumer than one might believe. This is probably hard to fathom given that the consumer represents 70% of the US economy. However, what some people fail to recognize is that the variance in the economy’s growth rate – which is what is actually captured in the chart – is more closely tied to the evolution of government, investment and export activity than it is to consumer activity. Simply stated, the growth rates for these three other GDP line items are up to 6 times more variable than consumer spending growth in any given quarter.
So it is not only arithmetically possible, but rather highly probable, to see relatively large GDP growth prints generated over relatively short periods of time immediately following deep contraction even in the face of continued tepid consumer activity. While this current downturn has been atypically severe in the post-war period, it would be equally unusual to see the relatively soft recovery currently forecast by the economics community.
Bottom Line: Forceful and unorthodox monetary policy working in tandem with generous fiscal policy efforts have helped fill the void left by a collapsed private sector. Foreign economies have perked up at the same time that production is turning higher. Not just positive, but perhaps even robust, North American growth could be on the boards before 2009 draws to a close. Of course, if the leading economic indicators are “broken” and the labor market doesn’t turn, then we are indeed staring down the pipe of a very serious problem. Yet, it seems too early to us to draw this conclusion.