Indiana Jones Economist Unearths S&P Index ‘Wall of Worry’: 2% GDP

Climbing the ‘Wall of Worry.’ It’s one of those vague clichés that Wall Street pundits have relied upon for many years (including right now), but have always failed to define specifically when pressed… until now. The Indiana Jones of economists, Don Rissmiller at Strategas Research, has unearthed the so-called wall of worry and finally defined it for the world to see.Based on history, the threshold at which the ‘worry’ about the economy turns into actually reality is 2 percent gross domestic product growth. Rissmiller notes that in the jobless recoveries of 1991 and 2001, GDP slowed to 2 percent, creating a similar tense, uncertain environment that sparked numerous ominous forecasts about a double-dip recession, but that eventually led to a lasting recovery.

Traders will hit that wall at 8:30 a.m. tomorrow when second-quarter GDP is released by the government. Growth on an annual basis is expected to slow to 2.5 percent from 2.7 percent, according to the consensus estimate from economists compiled by Dow Jones.

"When you fall below two percent, you are in a danger zone that could get the economy into a self-reinforcing downward spiral,” said Rissmiller, who previously worked for ISI Group. “It’s not uncommon to see growth slow to two percent for a quarter or two” as an economic recovery matures.

The economist calculates this "invisible wall" by adding up population growth slightly under 1 percent and productivity a bit more than 1 percent. Therefore, this is the minimal growth that S&P 500 companies have likely forecast in their models to remain profitable. Any expansion in the form of output to meet increasing demand is all gravy to the bottom line.

"Below two percent growth is below potential," said Peter Boockvar, equity strategist at Miller Tabak. "So it would be a big negative in terms of financing a still overleveraged economy and generating enough job growth to lower the unemployment rate."

For the record, Rissmiller believes GDP will come in stronger than that tomorrow. He believes enough inventory, capacity and jobs have been removed for the economy to ramp up to three percent growth annually as we go into 2011. However, Rissmiller warned that a "policy mistake," such as a large tax increase, or another credit crunch, are two things that could turn this wall of worry into a reality.

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Ref: http://www.cnbc.com/id/38469418

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team

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