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Friday, May 29, 2015

US, Canada GDP Negative

They scoffed when we said that the economy was in recession. But, when the governments of both Canada and the US reported Q1 GDP actually falling, they aren't scoffing anymore. Canada's GDP fell by 0.6% while the US fell by 0.7%, both subject to substantial revisions in the future. You may recall that during the last recession, the first reports had GDP shrinking by a similar amount. Years later, the government confessed that the economy was in freefall in the early days of the recession.

Now, GDP being negative isn't a definition of recession. But, it certainly isn't a vote of confidence. With stock prices having been pushed to nosebleed levels for the third time in the last two decades, there's a cliff and the stock market is looking awfully unsteady with the prospect of a recession. And, remember, the Fed is out of bullets, only having QE to stimulate asset prices, not the real economy. There's a reason why the Fed wants to raise interest rates—to be able to lower them if a recession strikes—but it may just be too late in the business cycle for that to happen. If so, expect the Fed to trot out QE and push stocks further toward orbit.