A mild contraction under way?

This is an interesting chart. It is 10-year bond rates since 2008:

For whatever reason I decided to look at this chart as though the US economy was a submarine that hit a seamount, specifically the USS San Francisco incident in 2005 when the nuclear powered sub ploughed straight into the side of an undersea mountain (see this pic). For a while it was touch and go but the crew eventually survived the ordeal.

From looking at these bond rates we see very, very clearly the Q4 2008 financial distress. Bond rates plummeted as investors fled from shares to secure investments. GDP in that quarter plunged by -1.7%, or -7.0% in annualized terms, the worst quarter since Q2 1980. It was a huge financial and economic hit. Remember Lehman/WAMU/AIG? Q4 was quarter which immediately followed those collapses.

By July 2009, however, bond rates had returned to around 4%, and have hovered there since about March-April 2010. Since April, though, rates have begun sinking again.

These rates are dropping slowly, which means that the US economy is probably not going to hit another financial seamount, but will experience, at the very best, very little change in GDP. My opinion is that a contraction is under way and that GDP Q3 and/or Q4 will be mildly negative.

A major indicator will be August CPI figures. If there is a month-on-month decline in the price index, the chances of an economic contraction increase. Prices declined in April, May and June and only an increase in July prevented a four in a row reading (which has not been experienced since 1954). Weekly jobless figures are increasing too, indicating a slowdown.

No comments: