On Monday, Christopher Wood took to the pages of the Wall Street Journal to make the case that a double dip recession is a real possibility. He cited the weakening outlook in Europe, the threat that outlook poses to financial markets, a cycle of tightening policy in China, along with the growing deflationary threat and the possibility of a wave of protectionist activity.
To what does all of this amount? Clearly, the outlook for the global economy has worsened in the last month, but by how much? Markets provide some evidence. In America, stocks are still up a good 50% from the lows hit early in 2009. Commodity prices, too, are well above the levels they plumbed during the darkest days of the recession. If the outlook isn't as good as it was in April, it is still considerably better than it was last spring. But this grows less encouraging as markets continue to fall.
The evidence I showed were various proxies for current aggregate demand and a consensus forecast for aggregate demand over the next year. They all pointed up. I also showed the sharp productivity gains which should account for the deflationary pressures. For me, this data clearly says the deflation concerns arising from the April CPI report are misplaced. But here is the rub: all of my evidence goes only through April. Ryan is looking at more recent market data which does paint a bleaker outlook. Too bad we don't have a nominal GDP futures market to shed light on these developments.