4th-Quarter GDP "Boom" Sets Stage for Double-Dip Recession

4th-Quarter GDP "Boom" Sets Stage for Double-Dip Recession 02/02/2010

5.7% Annualized. That was the number which came out on January 29th, 2010. The first thing to realize is this number is a guestimate. An "advance" or initial estimate is practically worthless, since most of information is guessed at, and the resulting quarterly growth rate then is annualized for release of the happy headline number to the public and to the popular media.

Take for instance the 3.5% number reported for 3rd Q 2009. It was later revised with actual information down to 2.2%. Considering the stimulus added 4% to that number, if you take out new government spending we really were at -1.8%.

Of the 5.7% GDP number, 3.4% was due to inventory buildup. This is taken as companies are preparing for a surge in spending. Princeton University economist Alan Blinder found, in his historic 1980 paper, that inventories, while accounting for less than 1 percentage point of national output, accounted for 37 percent of the fluctuations in output. Bottom line; predicting the future is really hard to do and companies usually overshoot when they believe the all the recovery double-talk.

Blinder basically stated in his paper that the other way to look at the build-up of inventories is that companies anticipated stronger sales and they loaded up on stuff. They then did not have the sales they expected and now have too much on hand, which generally leads to the next quarters GDP number to fall off a cliff.

I expect this to happen and that the 5.7% number will be a punctuation point of interim top of a double dip recession followed by an inflationary surge towards the end of 2010 as the Federal Reserve realizes too late their actions only postponed the inevitable and are again forced to monetize the US debt to cover our deficits.

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