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January 21, 2008

Is the U.S. "Special"?: The Double-Dip Hypothesis

With global markets in full tailspin today, but U.S. markets closed for the holiday, time to revisit the double-dip hypothesis. It becomes even more real (in a back-door way) with a startling release from Citi mid-day:

We now expect the Fed funds rate to get to 2.5% by the summer (previous range 2.5% to 3%) with more if the economy fails to respond. We look for GDP growth this year of c1% from our previous forecast of 2.3% with a negative first quarter. But with this marked response by the Fed we see something of a (flattish) “V” shaped recovery with growth annualised growth of c2% in the fourth quarter.

Get that? Citi cuts 1% U.S. GDP growth in 2008, down from 2.3%, including shrinkage in the first quarter? That slashed estimate is, in a word, big, even if Citi thinks it will turn into a V-shaped recovery based on major Fed cuts (and U.S. fiscal stimulus).

Let's say that's correct. How likely is that the stimulus sticks? The Fed doesn't have as much room to move as it did in 2001, and, if you read the research, you'll see that it's a myth the 2001 U.S. tax cuts contributed much to the story.

So then it comes back to "how special do you believe the U.S. economy is", to borrow a line from a WSJ article today. Recent recessions have been business-centric and mild, and this one will certainly not be the latter, and, given the continuing fictions around mortgage markets and credit in general, it's debatable whether it will be the latter either.

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