Although the decline of 18% this summer feels painful, Doll said, it is on par with the 17% decline last summer. The reason it feels worse this year is because 11% of the decline came on three consecutive trading days. “We’re not living through anything we haven’t lived through before,” he said.
There have been 30 declines of 15% or more in the S&P 500 since the Great Depression, Doll said, and only two of those times predicted a recession. While this could be the third time, Doll said that he didn’t believe it would be. Increasingly, he noted, the phrase “don’t confuse the U.S. economy with the U.S. stock market” is appropriate.
Doll pegged the probability of the U.S. going into a recession now at 30%, compared to a normal probability of 15%. The reasons Doll cited: Unemployment claims are steady, bank lending is moving up, credit card delinquencies are down with personal debt levels falling noticeably, and corporate debt levels are down as well.
Recessions are driven by housing and autos, Doll said. Of those two sectors, “we’re currently building new homes at less than half of population growth…and are making cars at three-quarters the rate of population growth.” When “you’re already down,” Doll noted, “you can’t tank.”
“If you’re in the basement, can you fall out the window and hurt yourself?” Doll asked the audience, citing an economist.
In fact, he said, the vital signs of economy are reasonably good; the mortgage problem is “slowly moving to the backburner,” and the corporate sector is in “fantastic shape.” Although he noted that his prediction was for “growth below trend,” he said growth in the second half of 2011 will likely not be as weak as bonds or stocks have priced in.
According to Doll, there is some recovery likely, and he presented six ideas, saying, “if just a few of these come true,” the U.S. will see 2% growth.
- Less pain at the pump
- Global supply chain disruption from Japan earthquake is fading
- Pace of deleveraging is slowing
- Plenty of pent-up demand (Auto sales below population growth; housing starts less than half of what is needed to keep up with population growth; business equipment and software)
- Labor market recovery (Some improvement in initial unemployment claims; growth in average workweek; modest nominal wage growth; profitability rates high)
- Fiscal restraint likely to be only modest drag over next two years