Is the recovery over?

The first negative GDP print since 2009 has confounded the bulls. And there is more pain coming.

By Anthony Mirhaydari Jan 30, 2013 1:44PM

For the first time since the recession ended in the middle of 2009, the U.S. economy contracted at the end of last year. Fourth-quarter GDP growth fell to -0.1% from a 3.1% rise in the third quarters, surprising the optimists so focused on Dow 14,000. As I've been saying for weeks, the fundamentals didn't justify the market melt up. And eventually, fundamentals matter.


The optimists are already trying to dismiss the report as a fluke since a large part of the drop was connected to a 22% fall in defense spending. It's no fluke: In a month, the Pentagon will likely be hit with another budget cut worth 9.4% of its discretionary spending, or more than $50 billion a year.


And it's about to get worse.


People forget that it was government spending -- in the guise of bailouts, unemployment benefits, and stimulus -- that bolstered the economy in the early stages of the recovery when business and consumer spending was in the doldrums. Now, with businesses nervous and consumers suffering from tax hikes, higher health care costs, and still stagnant wages, the government's fiscal mess is forcing it to pull back.



The bulk of the fiscal cliff -- the tax hikes and spending cuts worth 5% of GDP -- was merely postponed. The fact remains that the government has no choice but to tighten the budget, or else it faces the threat of additional credit rating downgrades.


So people should get used to weak government spending contributions to GDP.



What about consumers, who contributed +1.5% to the Q4 GDP number? Not only is confidence down hard on the payroll tax hike, but they are about to be hit with higher gasoline prices and higher rental costs as well. Moreover, the chart below shows how government budget cuts will impact consumer spending -- which the bulls and political operatives are grabbing onto as the bright spot in the report -- since government transfer benefits (unemployment, etc.) have been a more important factor than work wages.



All of this will drag on consumption expenditures later this year and reverse the one bright spot in the report.


And businesses started pulling back on inventories in Q4 in response to uncertain demand from consumers. This should continue as well.


A second negative GDP print in Q1, amidst budget battles and tax hikes, would technically throw the U.S. economy back into recession -- joining most of Europe, Japan, and soon, the United Kingdom.


If you average out the last two GDP prints, you get an economy stumbling along at a 1.5% annual growth rate. An economy that isn't ready for the fiscal cuts and political turmoil that awaits in 2013. Already, the regional Fed manufacturing surveys have been terrible. Home sales are down. It's not looking pretty.


In response, I'm adding new short exposure to my Edge Letter Sample Portfolio via Alpha Natural Resources (ANR) and U.S. Steel (X). I'm also doubling up on the VelocityShares Daily 2x VIX (TVIX) with the CBOE Volatility Index ($VIX) deeply oversold and rounding higher.


Disclosure: Anthony has recommended X short, ANR short, and TVIX long to his clients. 


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Jan 30, 2013 3:24PM
Another thought. You have some talking heads tell anyone with a few bucks to buy this or that and then you get to redistribute that money as it is gone!!!! !!!! !!!
Then you just have to print some and give it to the folks like the GM union and some solar guys...

What a disaster this country has become - sad there are so many who believe in this change...
Jan 30, 2013 3:23PM

In 2007 stocks were at all time highs when according to the so-called economic experts a recession had already begun. But the TV pundits will tell you: stocks know, stocks are smart, stocks are an indicator. That's why they keep ramming that ridiculous dow number down your throat every 2 minutes like some kind of stinking mina bird.

Jan 30, 2013 3:22PM

Is the recovery over? When did it begin? 40 million people- 84% of them family men breadwinners, lost their jobs by suspectful reasons in 2007-08. Suddenly, we bail out banks (TARP) even though it was clearly obvious that the hyper-appreciation brought on by the Republican-sponsored Tax Reform Act and terroristic-crafted Republican legislation- Gramm Leach Bliley Act, had caused massive woes to the financial sector. Since 2008, we've had a treasonous Pledge to a lobby, money-laundered PACs and fake charities. What we haven't had is-- recovery. The markets have risen on fiat-printed dollars pumped into the stock markets so that employee-terminating import-driven drop-shipper platforms of hired-in GOP management can master-raise themselves to False Elite status in their own minds. We the People haven't seen any family-sustaining job creation, crushing of the social-clique making hand held devices, alumni-corruption and collusion investigations, a tax on the rich or jail time for those who drove us into this ditch. Meanwhile... the scholar trying to create World Peace while 99% of global peoples are infuriated with Central Banks, Globalization, Big Brother and Complex Financial Instruments... hasn't addressed the CORE PROBLEM once. Reach out, take on the 99% as partners, snuff the 1%, redistribute or create new currency, torch Banks, the Federal Reserve and Wall Street with all exits blocked and-- move forward. You have to SEE RECOVERY, not dream it up on spreadsheets.  

Jan 30, 2013 3:20PM
There are those that are in positions of power who are well aware of and will actually rejoice in this development.  It seems so hard for so many to unprogram themselves to understand the complete compression of our economy and the resulting reduction of wages and lifestyle is the plan.  So many stand and scream that these idiots don't know what they are doing the entire time not one beep out of any DC electerds because the plan is working quite well thank you.  This is the New World Order we have been signed up for, only without our knowledge, support, or consent.  We should never have allowed this free trade nonsense to start with but with so much envy or anger at Unions if you will, it became quite easy.  You folks do understand there will be no jobs recovery and a housing recovery would be disastrous for this "program"?   The arbitrage of the Asian and third world economies is running along quite well and with a continuation of high unemployment all is good.  But only if you aren't a working American.  Just imagine as a small business owner in America all the guberment red tape, EPA, taxes, employee expenses and laws. Do you get this idea?  And the Internationals can bring all these cheap goods in from overseaes with none of it.  Is the picture getting any clearer?  Tell me just how can any American worker or small business even have a chance?  And all this by design yet sooo many just don't get it. So the end game will be total chaos with demands for jobs no matter the lowered wages while the Corporatistic political system will rejoice for a job well done and younger Americans will live the lifestyle of the workers in China, Mexico, and Korea.  This "IS" the plan!
Jan 30, 2013 3:20PM

GDP growth shock?? huh? who's shocked by the contracting economy except you idiot leftist pigs in the media, the rest of us know what the deal is, you idiots are acting like everything was 'honkey dory' all along, this regime is hammering the economy with ridiculous phony influx of 'phony' money, the fed's buying up stocks, in essence buying it's own product, much like the stupid chevy dolt, the majority of those ugly azzed cars were bought up by gov't, recovery??? what recovery is that?? unless you're 'recovering' from the flu the economy is in recession like it's always been, now just getting worse, NY unemployment is 8.8%, in reality it's 14% outrageous!! meanwhile get ready for new taxes! on who? the mid class of course, and once again I'll just have to laugh, everything we've been saying about this obama pig muslim's idea of utopia in America has come to it's fruition, coming to it's fruition, meanwhile Sandy "victims" are out in the cold, literally and financially as well, WHAT A SHOCK!!!! not!


oh yea, and I'm still laughing at the 'penaty' you smokers that voted for that pig obama are going to have to pay try $5500! ahahahahahahahahahah!!!HAHAHAHAHAHAHAAHAHAAHHAAAA enjoy and revel in the phony messiah you voted for and will now seperate you from your money, hahahahahaha!!!HAAHAAA!!

Jan 30, 2013 3:20PM
Damn. I must have blinked, because I missed the recovery.
Jan 30, 2013 3:17PM
This guy was all - Yay we are back a year ago while I shorted GM, Facebook and Apple.
Purchase metals and stayed away from any longs. - Now he thinks we have a problem?

I know some of you have read some of my posts over the last 5 years or so - so how do we all of a sudden go bad when everything was great.

People like this need not give us advice on anything... I'm not qualified to give anyone advise, but man how far off can you be.

We will have another meltdown within 2 years if you ask me.

Jan 30, 2013 2:51PM

MG...don't you ever get tired, just spewing the same old BLAH BLAH this point , Charlie Brown's mother makes more sense WHA, WHA, WHA.

You can't have it both ways...first...the resetting of the social security tax back to wrote a number of times that it should never had been reduced to 4.2% in the first place...and now you're railing against that.

And then, as far as the Federal Income tax increasing to anyone earning over $400K...really!.....very little effect on the economy increasing taxes on the top one half percent....oh I're in that top half of percent....BOO HOO HOO, BOO HOO HOO.

Like I said many times the 60's the marginal tax rate was 90%, yet we had plenty of wealthy people then...but we also had a vibrant growing middle class then also...the economy grew from the middle out...not from the top down, the way you want it to.

Jan 30, 2013 2:46PM

Good viewpoints. The large number of unemployed, not the phony government data but ALL unemployed, and the job creation rate well below what is neede to just accomodate new entrants into the job market, alone, in my opinion, constitute a continuing recession as far as we can see. Wall Street and Washington deceive the public for their own interests, financial and political.

Repressive regulations, government debt bloat, and a horrific tax code assure continuing volatility, leaving a lot of potential investment $ on the sidelines or flowing to other countries.

Jan 30, 2013 2:29PM
Welp, Obama slammed on the economic brakes with his tax increases.  What did the imbecile think would happen?   You cannot shrink paychecks at any level and expect the economy to grow.  Obama continues to try to tax and print our way to prosperity, and to borrow and spend our way out of debt.

Worse still, is he promptly pissed away every dime of the new revenue with 'Sandy' spending in states that the storm didn't even touch...   

Lazy, Arrogant, Corrupt and economically clueless....  that's Obama and the democrats...
Jan 30, 2013 2:26PM
This columnist, while very bright and perceptive, has a tendency to bearishness. Arguments can be made as to the effect of several events and issues that impacted the GDP metrics, They include superstorm Sandy, fiscal cliff and other congressional/administration debacles, the impending hike in SS taxes, etc.
.. and the elephant in the living room, federal debt.
Conversely, there's pent up cash that has been lying dormant since 2008 that needs to be loosened to fund retirements and serve as the much-required fuel to underwrite business spending for the future.. in all aspects of what the "future" implies.
Stick around! This will be fun.
Jan 30, 2013 2:24PM

The stock market is fueld by Ben Bernanke.....both with easy money and with the manipulation of interest rates.    Despite his failed policies, Wall Street continues to look at the federal reserve as the solution, when in reality they are the problem.

The federal reserve needs to quit printing money and let the market dictate interest rates

Jan 30, 2013 2:22PM
And this is the one in four columns of Mirhaydari's columns that make sense.  If the White House is blaming Sandy for the decline in GDP, if GDP restarts, will they adjust the increase for the amount spent rebuilding from Sandy? Can they subtract all themoney printing during the 4th quarter that added to the GDP? And if the lack of defense spending is blamed, who will be to balme when the Obama induced defense spending cuts take hold 
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