The economy - why double dip are likely?

Purchasing Manger Indexs around the globe have shown some inspiring news in recent months. In the US, the ISM manufacturing has turn into expansionary territory in the month of August; while the ISM non-manufacturing has bounced sharply from the low 30s at the end of last year to print at 48.4 in August. Global consumer confidence, business confidence also show some improvements. Moreover, employment, home price and home sales seems to be stabilizing. Given that the United States are 19 months into the recession (NBER currently declare that dec 07 is the beginning of this recession, source: http://www.nber.org/cycles/cyclesmain.html), and the fact that average post world war II contraction lasted only 10 months and the longest post war contraction lasted only 16 months, there may be an impulse for us to conclude that the economy will get better from here.

Evidently, the sizable expansionary fiscal and monetary stimulus around the globe since the beginning of this crisis have prevented a 1930s style depression. Yet it is too early for us to declare that the contraction is over. First, supply of credit will remain tight. Feds senior loan officer survey still indicating that banks continued to tighten standard and terms on all types of loan in second quarter. Once bite, twice shy, it is understandable that these banks will continue their prudence in lending until they see true economic expansion (such as increase in nonfarm payroll). Secondly, the consumers, the engine of US economic growth, is not showing much signs of improvement. Retail sales excluding food is still near the lowest level of this economic crisis print in December 08. Just like the bankers, once bite, twice shy, the consumer is not likely to go on a spending spree until their balance sheet is fixed and job market start to show some real sign of growth. And with plenty supply of existing homes and new homes on the market, residential investment is probably going to lag for a while. The expansionary policy around the globe has put a break on the free fall of global economy. But they have not yet lift the economy up, as evident by the continued job loss around the globe. And if the employment picture do not improve when the fiscal stimulus run out, consumer spending and private investment is likely to remain meager. Hence, we are not out of the wood yet and will not be out of the wood until we see nonfarm payroll growth.

In fact, a good indicator of economic growth is global trade in raw material. Because all production requires raw material. The Baltic Dry Index, an indicator of demand for shipments of raw materials is showing some interesting sign. The BDI fell off a cliff late last year, just before economic activity reach a low. It has bounce back slowly and reach a high in early June, but the high is still 60% off before the crisis hit. If there isn't much demand for raw material, how could the prospect of economic activity be good? The government stimulus will continue to provide support for the economy, perhaps into early next year. The final judgment on the economy can only be made at that time, when the stimulus fade out. If growth in the private sector cannot kick off (my guess is it probably won't), we could be in for another round of economic contraction. Maybe it's time to start planning another round of stimulus (as a contingent) now and instead of rushing through anything when something has to be done.