What is a recession?
What is a recession? I no longer know...not quite sure I ever did. The gap between reality and perception has widened expansively as of late. According to our friends over at NBER the "Great Recession" ended in June 2009. Like many of you, I can regurgitate a few different textbook definitions with varying degrees of depth and accuracy on the subject. But how do we really define a recession or better yet, how do we separate it from a depression?
As the old economist joke goes: A recession is when your neighbor loses his job, a depression is when you lose yours. Though "knock-knock" prima facie , there is a lot of truth in this statement. Perception easily becomes reality.
Depending on who you talk to (and more importantly) what their station in life is, you will get wildly differing opinions as to the state of our current economic situation.
But let's take a step back for a sec and look at one definition . The general signs were clearly fulfilled: two plus quarters of sinking GDP, higher unemployment, decreases in the stock and housing market. The question remains, however, is it really over or is it just taking a breather?
I have yet to meet an expert who would be willing to stake a claim as to either the stock or housing markets improving on a consistent basis any time soon. There are many who argued some years back that we were over-employed and that unemployment had to rise into the 10% neighborhood.
On the flip side, finding those who think the worst is yet to come in housing is not at all tough. Individual investors are running scared from the stock market and the GDP growth has been just statistically expansive enough to beat out earlier definition's parameters. Overall, there are certainly more bears than bulls. Not unexpected, but how telling exactly?
In comparison to the last 7 recessions going back to 1961 one statistic stands out in my eyes.
3) retail sales growth is at the bottom of the range
I think this tells a big part of the story, as well as, our well noted dependence on consumer consumption. We have heard so much rhetoric from both sides of the political aisle about what needed to be saved and preserved, that this bit of info is constantly getting lost in the shuffle.
If people are not spending and small businesses are not thriving (or at least surviving), the economy is in de facto stagnation. Whether a few stimulus induced spikes in GDP growth officially end a recession or not, is really not the issue here. How people are living...is.
One of the things I feel many of us (myself included) are guilty of, is not looking at this from an overall perspective. Are statistics and historical data enough...anymore?
What is a recession...really?
I think the reduced consumer spending is a good thing- because it means an increased consumer savings rate. This is going to provide a buffer for the next recession and send less of consumers' hard-earned dollars overseas in the form of interest payments.
I wonder if we're seeing something kinda similar to the 1980-1982 recession, which really came in two phases, or even something more like the 1973-75/1980-82 recessions. Coming out of 1975, everyone knew there were still some serious structural problems in the economy. And after the recession took a breather in 1980, everyone knew oil prices and inflation were still a huge problem.
The past two years have done a lot of work in the economy- the consumer is in MUCH better financial shape- he's gone from saving 1-2% of his income to saving 6%. But the story isn't over yet- the government is spending too much.
So could there be another big one? Probably. Typically, after the first contraction in a secular bear market, the next recessions tend to be more painful as the country works out its economic woes. I would not be surprised if unemployment hit 14% at some point in the next five or six years.
Does that mean we'll see another crash? That appears less likely with equity P/Es at 13-14. There could be a currency panic or concerns about long-term debt, but if earnings continue growing, real yields remain moderate, and the market remains pessimistic, there's no reason the DJIA would have to dive significantly into the quadruple digits during the next recession.
In any case, once the government solves its fiscal issues, we don't have any major economic issues on the horizon besides maybe global warming and energy. And there's a light at the end of the tunnel on those.
Fair enough. But how does the excess savings work as a buffer, when it needs to be (at least partially) spent in order for growth to occur. You are also assuming all of the savings are actually going in pocket and not to pay down debt. The two are most often, mutually exclusive.
This has crossed my mind on occasion. However, as in our previous discussion I'll point to the key difference between then and now being the U.S. power position in the world. Though I am far from bullish on BRICs long term, today's level of competition is certainly greater than back then's faltering USSR. In other words, much less room for mistakes.
Agree/disagree. Yes, the government is spending too much and I don't mind being called out for saying it every single day. It isn't just the spending it is the frivolous method of doing so and acting as if it is the rational way. No, I'm not sure the consumer as a whole is in much better shape. How much of the savings rate is coming from unemployment? Sold off vintage Star Wars figurines on ebay? Cashed out annuities, pre non-tax penalty withdrawal stage. THIS is what worries me. Yes, we are increasing savings rates, but at the cost of what? How do we model for it going forward? I don't think we can.
This one I co-sign 100%. Again, my fear is that our mentally weakened and emotionally breastfed until the age of 41, public is not capable of those sorts of strains and we will see a seismic shift to European style government. Which will kill off a lot of tradition and history (from both social and economic standpoints) within a very short time frame.
Still haven't posted the P/E topic. We can get into it then. Not a fan of the DJIA as an accurate forward-looking metric.
What makes you so sure they will? Ever since they gave themselves guaranteed pension plans, members of the house and congress have really very little motivation other than the status quo. Since this occured in 1988 (can you recall the name of the bill? I've been looking for it, but can't remember the exact name) things have decidedly changed in Washington. One could argue that the parties merged at this time, in spite of the attempts to differentiate from one another on rhetoric.
We haven't had to deal with any of that, yet. It sounds crazy, but I think we're in better fundamental shape than we were in the 1970s.
I'm not saying the DJIA is a good indication of where the economy is heading- I'm just saying that another recession doesn't necessarily mean there will be a 40% drop in stock prices. So it's obviously time for a third party. People were po'd back in '92 and we got Ross Perot. If he hadn't dropped out of the race, he probably would have been elected.We've got folks like Bloomberg and libertarians like Ron Paul; they would make viable third-party candidates.
Not living hand to mouth anymore? I can name a dozen people of the top of my head who lost high paying skilled jobs and are either: still collecting unemployment or have given up the search in their area of expertise and settled for faaaar lower paying gigs. Ironically, they all have fatter bank accounts then before. They have woken up to the reality, however, this in turn brings about a lot less discretionary spending. Having $300 in your checking account while making $80K is a lot more than having $3000 and making $30K. Just saying...I don't trust those numbers to transfer over into consumption so easily.
Two problems: 1) you ignore the underlying significance of military might in economics. I believe there is a great fallacy in later day history to ignore this correlation. YES, Japan was light years ahead of the U.S. in the 70's, yet they were (and still are) a conquered colony, of sorts. Today's competition is a lot more capable of creating the sort of standoffish tensions Japan wouldn't allow itself, both due to cultural and self preservation reasons. 2) you're on point about quality, the eight cylinder point is very well taken but the national loyalty to products isn't there like it was in the 70's. Have you seen the latest Buick Regal commercial? Look it up and you'll see what I mean. The U.S. is great on manufacturing (another topic I keep neglecting to post), but perception is reality and unfortunately, getting the reality and perception in sync can take a very long time.
We'll agree to disagree here. Macro, yes. Micro, no. Which is more important. Semantics.
Again, I agree with the statement, but not the rationale. Different America. Today you ask people what their background is they say 1/8th German, 1/8th Irish, 1/4 Dutch, 1/2 Italian, and .0003 Buddhist. The country you're cross-referencing had WW2 vets, Depression survivors, proud Americans...today...all of those are in short supply, leading to a completely different form of group think.
Co-sign. Move on.
Read about what happened to him during that election. What really happened. Cross reference with my first response in this window.
The picture is now up in my cube.
The best thing that can happen for the country is for the Democrats to lose control of Congress and the Republicans to embrace the Tea Party. A big reason why the economy is as fouled up as it is now is because when the GOP finally got control of Congress, they acted like Democrats: more spending, more social programs, more regulation...and lower taxes? Horrible combination. Instead of correcting those mistakes, though, what did the Dems decide to do? Spend more, borrow more, and ramp up the war effort. And what's their rationale? Because the Republicans got the chance to screw up we should have the chance to screw it up worse?
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