It is a good thing that America has a functioning, objective and analytical media, as otherwise we might need David Rosenberg to point out that one of the key factors for the avoidance of the technical double dip was a completely unexpected number fudge courtesy of the Commerce Department which, at the most crucial stage in the economy's conversion into a re-recession, miraculously "found" $46.3 billion in personal income that "the consumer thought wasn't there before." In other words, the government literally pulled a number out of thin air which created a relative sequential boost to the economy, even though it was just a non-recurring accounting adjustment to continuous numbers and should have been completely ignored! By then it was too late (very much in the same way that the BLS has had 44 out of 52 adverse data revisions after the data has been reported, when it is too late for its to impact asset prices): it set off a chain of events which resulted in a jump in ISM, diffusion and various other indices (not to mention the BLS endless data adjustment) which caused a last second avoidance of the double dip becoming official. Oh and the Fed's QE2 did not hurt either...
From David Rosenberg:
THE REAL CAUSE FOR THE RECENT EXUBERANCE
It may have been partly due to QE2 and partly due to the latest round of fiscal goodies, which gave sentiment a lift even though the change doesn’t fill people’s pockets until this quarter. And there is no doubt that the Europeans have managed to convince everyone that the debt problems are behind us ? that has helped out too in terms of underpinning confidence.
The real kicker was the fact that personal income was revised up $46.3 billion in the second quarter. This was huge ? the Commerce Department found $46.3 billion for the consumer that it thought wasn’t there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people’s perceptions of how the economy was performing. When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously and while (like the payroll tax cut for Q1) this is really just a LEVEL shift in earnings, there is an initial thrust to growth rates, at least for a few months. This is essentially the reason why, along with perhaps a moderate wealth effect from the stock market runup, the holiday shopping season surprised to the upside.
This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday’s story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ? and likely Q3 as well ? to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don’t have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.
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