The Great Non-Depression

Story Highlights:

• Recent economic data have some in the media calling for the start of the next Great Depression.
• But growth is hardly ever uniform, and to foretell economic doom based on a slowdown is to miss strength elsewhere.
• The reality is the fundamental building blocks are strong and in place—no guarantee economic growth will reaccelerate, but it likely rules out collapse.

Economic data released Wednesday tipped off new discussions of US economic peril, including the suggestion, “We’re on the verge of a great, great depression.” To be kind, we’ll say that’s quite an overstatement. (Those who lived through the actual Depression might be less gracious.) While growth as indicated by a handful of economic sectors may have slowed some recently, we’d argue we’re far, far from a repeat of the Great Depression. Let’s look at some of the more cited causes for concern.

Job growth slowed in May (according to ADP) as the private sector added 38,000 jobs—its lowest level in eight months. We’ve discussed unemployment and its lagging nature myriad times (like here and here), so we won’t repeat those arguments. But when it comes to unemployment, keep a few additional things in mind: First, while some (angrily) claim a job market collapse is underway, the most recent number still indicated job growth—slower than it’s been in previous months, but growth nonetheless. (Not to mention unemployment reports are notoriously wonky, with some sources citing greater employment growth recently.) Second, even if the unemployment rate remains elevated for some time, folks tend to forget it pretty significantly lagged the recession’s end in 2001: Though the NBER determined the recession lasted from March through November 2001, unemployment remained elevated through early 2005. So unemployment lagging this time around is hardly new nor is it likely to be very indicative of future economic conditions.

Manufacturing growth slowed to its slowest pace since 2009. But flip that on its head and you get something like: Manufacturing grew for the 22^nd consecutive month. Or like this: Manufacturing grew at its slowest pace since September 2009, meaning those other 21 months have been pretty solid—this one just slowed down a touch. (Which is normal—those other 21 months didn’t uniformly accelerate either.) And given much of the slowdown is likely due to short-term supply constraints resulting from Japan’s earthquake and tsunami, that readings are still positive is encouraging for what’s to come.

Q1 US GDP was unrevised at 1.8%, missing expectations of an upward revision to 2.2%, and Q2 expectations have been cut recently on the slowdown in manufacturing. To be sure, it’s a slower rate of growth from the previous quarter. But again, that’s still growth. And growth, even tepid growth, isn’t a depression—Great or otherwise.

Still more headlines now call for a “double dip” in housing—a sector whose troubles we’ve discussed frequently (like here and here). But we’d ask this: Given housing didn’t bounce back much from the first dip, how can it double dip? The bottom line is while a housing recovery certainly wouldn’t hurt, it needn’t precede broader economic growth (nor has it thus far).

Finally, many are beginning to point to low Treasury and bond yields as a sign of worse things to come—but that’s been exactly the Fed’s monetary policy goal over the past couple years, so why the surprise? To now bemoan low interest rates is to confuse cause and effect a bit. And low yields likely mean low borrowing costs and (in theory) easier credit—both of which should spur spending and economic growth. What’s more, if the US were headed for a new economic downturn, one wouldn’t expect to see corporate bond rates as low as they are now.

Great Depression? Not likely (and a bit premature perhaps to demand the return of programs like the Depression-era Works Progress Administration). Recall: Economically, growth took a breather last year, only to reaccelerate into year-end. Are we guaranteed a reacceleration repeat this year? No, not necessarily—but nothing’s guaranteed when it comes to economic growth (or markets, for that matter). Do we think a similar economic reacceleration likely? Considering fuel for further growth exists aplenty—like huge corporate cash stockpiles (that some bizarrely bemoan), rising corporate profits and increased trade—we’d say so. Most economic measures are still showing growth, but they’re missing expectations thanks to improved sentiment—which isn’t very surprising to us. Overall, there are just too many strong fundamental building blocks to indicate this slowdown is a sign of bigger trouble as opposed to a temporary ebb—and nothing like a Great Depression redux.