Calling the recession: not just a 'duh' thing

The private group charged with determining when U.S. recessions begin says we’re officially in one.

No surprise there. What is surprising in the report today from the National Bureau of Economic Research is that the recession began at the end of last year.

The traditional definition of a recession is at least two consecutive quarters of decline in the country’s gross domestic product. But after shrinking slightly in the fourth quarter of 2007, GDP actually rose, albeit slowly, in the first half of this year. (It contracted again in the third quarter, and probably is falling off a cliff in the current quarter.)

What gives? Well, the NBER allows itself a lot more wiggle room than the two-quarters-of-falling-GDP criterion offers. Here’s the definition used by the group’s business-cycle dating committee:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.

As it turns out, the numbers for income early this year weren’t quite as good as those for production (a.k.a. GDP) -- income adjusted for inflation actually fell in the first quarter -- even though the two measures are theoretically supposed to be equal.

But apparently the biggest justification for saying we’ve been in a recession all year is the cumulative 1.2 million jobs lost in the 10 consecutive monthly declines in the number of people employed at U.S. companies, even if the losses were relatively mild until recently.

If you lost your job in the first half of the year, it’s probably cold comfort to be able to say it happened during an official recession. And, in any case, the statistics on which the NBER based its declaration are all old news.

Still, the bureau’s determination offers something to think about -- potentially good news, even -- regarding the economy and the stock market:

If we’ve been in a recession since December, there’s a chance we’re at least halfway through it. (Some analysts predict economic growth will resume in mid-2009, though others say 2010 is more likely.) Just thinking we might be near halftime could provide a nice psychological boost -- and psychology is important in all downturns, maybe none more so than one triggered by a financial crisis.

That’s not all. Stock indexes typically bottom –- ending a bear market -- well before the economy starts to recover.

So if the economy’s been in decline all year, it’s not so far-fetched to think that, despite today’s 679-point slide in the Dow, the bear market actually ended when indexes hit new lows Nov. 20. We can only hope.

-- Arthur Buckler

Comments

[mr.bilko]

Part of the reason that the contracting GDP argument is debatable is that when gas prices skyrocketed, people spent the same amount of money overall but cut spending in other areas to compensate for high energy prices. And when this happens, restaurants, retail and the local economy takes the hit. GDP remains the same but your local merchant will tell you things are not the same.

High gas prices (above $3/gallon) has been strangling the U.S. economy since around spring of 2007 (see: http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html ). Track gas prices against the performance of the economy and the two move in different directions. When the public pays higher prices at the pump, most of the money goes into a black hole, i.e. the coffers of the oil industry. Gas station owners do not benefit from higher gas prices as they make most of their money selling snacks, refreshments and knick knacks.

If gas prices had been lower, then the money saved gets recirculated through the local retail establishments, and the local economy benefits. High gas prices benefits Exxon Mobile, Shell, and no one else, certainly not gas station owners who have struggled like the rest of the population.

Now that gas is below $2/gallon, expect to see the economy make a slow recovery. It will take a while before the benefits of $2/gallon gas work its way through the system. Since it took about 8 months of +$3/gallon gas to kill the economy in 2007, it will take at least 8 months of sub $2/gallon gas before we see the economy return to normal.

[Keith]

Psychological boost? What are you talking about? Are you aware that stock valuations are supposed to be linked to reality? Do you think the market is an athlete attempting a good performance, and it needs a psychological boost? Maybe the market should get a massage and a facial, and buy itself something pretty.

A huge portion of "investors" (actually clueless gamblers) think that stock prices make pretty shapes, and that these pretty shapes, akin to the shapes seen in the sky that make up the Zodiac, will define tomorrow's prices. wow. That is scary.

Stocks are an ownership position in a company. Does the value of your car follow a "head and shoulders" pattern? Does the price of milk? Stocks are ownership in a company. A company is a business that sells a product and hopes to make a profit doing so. When the business does badly, or is expected to do badly, the value of the business declines, and therefore the stock price declines.

Saying that it's good news the start of the recession was called as of a year ago is meaningless. Look at what is actually happening instead of ignoring reality and turning to charts and past trends. This might be the worst economic climate in over a century. Stop reading scrolls and telling us what has happened in totally unrelated situations. Every time a pseudo-expert like you calls the bottom you sucker a lot of people back into the market. The real estate industry did this for years, and now the stock industry is at it. Nice work.

[Tao Jones]

It is, in my view, extremely naive to trust that NBER couldn't declare the existence of the present recession until their first post-election report. Only someone who puts his/her faith in the massaged numbers dispensed by the government could be so gullible.

Those who recognize the manipulation of statistical data that government bureaucrats routinely perform have turned to John Williams' http://www.shadowstats.com/ to get honest figures. As a result, they've known since early 2008 that the country was in a recession.

Not coincidentally, the country was also in the grip of a presidential election at the same time.

Could the handwriting on the wall be any more obvious?

TaoJones

[concerned]

It took a year to call if a recession. In another year, they will call this a depression.

[mr.bilko]

For the typical person driving 12,000 miles per year and getting 18 miles per gallon, the yearly cost of gasoline at $4.50/gallon is $3000. The cost of gas at $2.00/gallon is around $1335. Assuming that 150 million people are active drivers, saving $1665 a year at the pump would be equivalent to Congress issuing a stimulus package of $250/billion to those same consumers.

We are probably going through the worst part of the recession right now. Jan'09 should be the low point for the stock market as 4qtr 2008 earnings reports trickle out and some retail stocks crater. The longer gas stays below $2/gallon the more likely consumers will return and the recession ends. Because consumers were gouged at the pump for about 18 months, they will not start spending again until they feel confident that $2/gallon gas is not an aberation.

[Arthur Buckler]

I agree with Keith that it's best to look past the psychology of the stock market, at least if you're a long-term investor. In my post, however, I was suggesting the possibility of a psychological boost for the economy, not the market. In the real economy, emotion does matter because it affects how much consumers spend and businesses invest. That's why FDR said during the Great Depression that all we have to fear is fear itself.

I would never try to call the bottom in the stock market. I was merely pointing out that the bottom could very well be behind us. Of course no one knows for sure. But it's my guess that an irrational, run-for-the-exits pessimism -- every bit as dangerous as a bubble mentality -- is what's dominating the market right now.

[martscan]

I take great exception to Keith's comments. I suspect Keith has little experience with the actual use and interpretation of charts, not to mention irrefutable laws of probability. Professional "gamblers", and stock and futures traders, as opposed to investors, are far from "clueless", and like the Zodiac, which is comprised of very real constellations through which the sun's light passes through in precise, repeated patterns, chartists rely on certain statistical patterns repeating with high degrees of efficacy. Gamblers live by the laws of probability if for not other reason than to determine a "fair" proposition.

Keith continues his fallacious argument of reality vs perception by stating: "When the business does badly, or is EXPECTED to do badly, the value of the business declines, and therefore the stock price declines." Is not the expectation of a company's success or failure based on what has gone before plus current fundamental conditions affecting the company which form the basis of a FUTURE prognosis of success or failure of the company? As Dow so brilliantly opined over 100 years ago, whatever affects a company's performance will be reflected in its price. I've been a professional trader for over 45 years and I never consider any fundamental of a company or a future contract...until after I have either bot it or sold it short...and only then as a matter of interest, not from the standpoint of buy/sell. In security trading, PRICE is the manifestation of perception. Ignoring this fact is fatal.

Keith's opinion to the contrary, learning that a recession officially began a year ago is, IMO. extremely valuable information and hardly 'meaningless'. Keith's own words belie his major premise: " Look at what is actually happening instead of ignoring reality (sic) and turning to charts and past trends. This might be the worst economic climate in over a century. Stop reading scrolls and telling us what has happened in totally unrelated situations." Keith, how do you know this might be the worst 'economic climate' in over 100 years if you haven't looked back at recessions, depressions, economic data, statistics, trends, etc? Your argument doesn't hold water.