Business • No Recession Now, but When?
No Recession Now, but When?
08/22/2012 1:12 AM LANCE ROBERTS
By Lance Roberts, StreetTalk Advisors
There have been a few calls as of late (Hussman, ECRI, Shilling) stating that we are currently in the next recession. Then there is everyone else. While the “optimistic” outlook is always more enjoyable to listen to – the problem is that the current “no recession” is primarily predicated on current quarter growth rates looked at primarily in isolation. These data points are then extrapolated into continuous future economic expansion. For example, in the 2013 CBO Budget the average economic growth rate used is 5.28% which is substantially higher than the 2% growth rate currently projected by the Federal Reserve. More importantly, neither the Fed, or the CBO, have forecasted a recession in future years. All assumptions are based on the expectations that somehow recessions have been repealed. This is hardly the case.
However, the no-recession camp is currently correct. The domestic economy is not currently in a “technical recession,” as measured by Gross Domestic Product, as the economy is growing at a 1.5% annualized rate in the second quarter. However, there is a mistake being made by many of the no-recession calls. Most of the assumptions are based on looking at the individual current data points of consumption, incomes, employment and production. The assumption is that since the data is not currently negative then a recession is not imminent. However, as investors, we should not be concerned with what is happening“imminently” but rather what the macro environment will look like six months from now. As we have often stated, it is not the individual data points that are important – but the trends of the data that tell the real story. Economic change happens at the margins.
A Recession Is Coming
It is an indisputable fact that a recession is coming. For economists, and analysts, the “R” word is as feared and loathed as the plague. A mere mention of the word will send them running in panic, pointing fingers and screaming heresy. The reality, however, is that recessions are part of the normal business cycle where the economy removes the excesses that were built up during the previous expansion.
As I stated, the recent prints of economic data are certainly not in recessionary territory. However, that small fact should not lead one to rest on their laurels when analyzing the data, and ultimately, making decisions about their investment portfolio. Take a look at the first table.
What the table shows you the quarterly rate of change of a composite indicator represented by the major drivers of the economy – real personal consumption expenditures, industrial production, real personal incomes and employment. The last column is the annualized growth rate of inflation adjusted GDP. While the numbers are all positive – they don’t really tell you much when they are taken out of context.
Once we add context – the table will make much more sense. Each of these numbers is where the composite index and real GDP stood just two quarters prior to the onset of a recession. With the economy currently growing at 1.5% annually it is difficult for the mainstream media and analysts to comprehend that a recession could be just a few months away. However, in second quarter of 2007, with the economy growing at 2.92%, it was unfathomable that the economy would be in recession just two quarters later. However, a study of the trends of the underlying data clearly showed an economy slowing
Statistics: Posted by yoda — Tue Aug 21, 2012 11:59 pm
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