MECHANICS BANK’S INVESTMENT CHIEF SAYS PROTRACTED VOLATILITY LIKELY
Double Dip? Ask the government
Richmond, CA, July 16, 2010 -- Just a few months ago economists and investors seemed to agree that the US economy was firmly but slowly on the path to recovery. Today, according to Brian Pretti, Senior Investment Manager at Richmond-based Mechanics Bank, uncertainty reigns.
“Anxiety and fear have been heightened by the volatility and uncertainty of the current environment,” Pretti says. “At the moment historically significant economic indicators line up about even on opposing sides of the playing field when it comes to trying to gauge whether a true double dip recession is likely.”
On one side, says Pretti, the well-watched Economic Cycle Research Institute (ECRI) weekly economic indicator currently rests at a level consistent with recessions of the prior four decades. On the other side, recent quarterly CFO and CEO business and economic outlook surveys suggest that there is no recession in sight.
For the optimist, it’s useful to point out that CFOs and CEOs have been quite accurate in calling historical economic cycle turns—and remember that approximately $360 billion of remaining stimulus funds is slated to be spent in 2011.
Pessimists need only two words to support their point of view: employment (or lack thereof) and housing—both of which have been dismal lately.
“It all hinges on government actions in the near term,” Pretti says. “As households and corporations continue to pay down or default on debt, government spending is the counterpoint balance to stabilizing macroeconomic outcomes.”
Pretti points out that 70% of US GDP is driven by consumers—and thus relies on growth in personal income. The only thing supporting personal income growth in the past year (a positive 2% growth rate) has been US Government transfer payments such as unemployment benefits. In fact, exclusive of transfer payments, US personal income actually contracted by 2%.
“A real key to near term US domestic economic outcomes will be whether recent levels of government transfer payments--especially extended unemployment benefits--continue in the clear absence of job growth,” said Pretti. “Since our elected officials have embarked on a summer recess without extending unemployment benefits for the 1.3 million folks who will lose benefits in July alone, it’s obvious that immediate household income levels and consumption will be hurt. It may not guarantee a double dip recession but it does mean economic growth will slow from the pace experienced in the first half of this year.”
“In the end,” Pretti says, “Whether the US falls into another academic recession is not the point. It’s the trajectory of growth in jobs and household income that are the key watch points for the US economy. If lack of job growth persists, it doesn’t matter what the experts call it. It’s going to mean protracted volatility in asset prices, GDP growth rates, and perceptions.” Pretti’s advice for investors? “Given the very special cycle of the moment that is really generational in nature, there really are no ‘safe havens’ right now,” he says. “Whether you are looking at corporate debt (bonds), commodities, stocks —everything is going to be affected by fears of sovereign debt defaults, a lack of consumer participation in the recovery, and uncertainty about whether the government will step up with enough additional stimulus and transfer payments. Amidst confusion often lies opportunity, but it’s clearly a time for investors to be honest about their tolerance for risk and their ability to focus on longer-term investment outcomes. Anyone expecting immediate gratification need not apply.”
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About Mechanics Bank:
Mr. David Louis