October 2009

A Recession By Any Other Name

Awhile back I mentioned that the talking heads did not want to acknowledge a recession, much less a depression, in the United States.  The level of denial about the economic dire straits in the United States struck home with me when I read one vehement poster on a website that I peruse absolutely deny that the United States was in a recession, much less a depression.  I was so shocked that I asked him the following, "about 20% of the people in the country are unemployed or underemployed, do you think they are depressed?"

What is a Recession

There is so much misinformation in the financial media, I thought I would review what a recession actually is.  Let's start with what it is not:

  • A recession is not back to back quarters of negative GDP (gross domestic product).  That definition is a shortcut people whose job it is to report and explain the economy use so that they do not have to report and explain what is really happening in the economy.  No self-respecting economist (if there is such a beast) would use that definition.

Here's what the National Bureau of Economic Statistics says: "The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

The NBER's definition is important because they are the ones who identify and catagorize economic expansions and contractions.  It's their job to figure out what a recession is and when it is occuring.

Taking from their guidelines we can surmise about where we are at today:

Real GDP (Gross Domestic Production): It looks set to rise for the most recent quarter by about 3% or so.  Unfortunately, adjusted for money supply growth (i.e. inflation), about a 3% growth in gross domestic production is in real terms no growth at all.

Real Income: According to the Bureau of Economic Analysis real incomes have been falling at about 1% per month for awhile.  Consider that only accounts for the employed.

Employment: According to the Bureau of Labor Statistics unemployment is rising by hundreds of thousands per month for well over a year.  Currently, we have about 15 million people unemployed according to the government.  I can only presume they are not counting all fifty states.  Take a look at this from Shadow Government Statistics:

Industrial Production: Here we have a slight glimmer of sunshine as industrial production turned very slightly positive the past few months.  This jives with my previous letters that the recovery will be business led, not consumer led.  The obvious problem is that this modest growth had much to do with filling inventory levels which had been allowed to deplete and as a result of various government inspired stimulus, i.e. cash for clunkers.

Wholesale-Retail Sales: Mediocre news here from the U.S. Census Bureau as these numbers were only very slightly up despite the cash for clunkers and other stimulus.

What does it all mean?

The bright spots are the industrial production numbers as it looks like businesses have retrenched.  It appears business is about done contracting which means that substantial shrinkage in the economy may be about done.  This does not mean that real growth is ready to resume yet however.

Unemployment remains very high and is still climbing.  Although it looks like unemployment is beginning to level off, with levels this high, it is clear that consumer driven growth is out of the question in the short and probably medium run.  Real household take home pay is also significantly lower than a decade ago which stifles household spending.  In the simplest terms, without good paying jobs, Americans will not be able to spend as previously accustomed to.  Put on top of that, high household debts, a result of many never planning for a rainy day, and the consumer spending malaise will last a long time.

Rutgers recently made the point that, "Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the jobs deficit! This is approximately 50 percent greater than the length of the average post-World War II expansion (58 months)."

What Rutgers, and others, are saying, is that a recovery to a fully functioning economy could take the better part of a decade.  I agree that is clearly a possibility, if not a probablity.

Turning Green Into Green To Spur the Economy

So, the reality of a business led recovery, as opposed to a consumer driven recovery is becoming much more clear to everybody.  A business led recovery will be slow, as businesses are not going to over-extend financially to ramp up production prematurely.  Even if businesses wanted to be more aggressive, it is clear that banks are not ready to accomodate.  Thus, businesses will move slowly, a step at a time, as global demand creates new business.  The American "spend and grow" economy is likely not only in a coma, it might just be dead and unlikely to be reborn for maybe a decade.  We will recover as the world recovers and our companies gain a share of that business.  It is incumbant that government help create conditions for that to happen.

So, what can we do to fix this?

It is important that government overcome politics and achieve several items in short order:

  1. Help create the conditions for business to thrive with rationale tax and incentive policies.
  2. Regulate healthcare delivery in a way that makes delivery more efficient, not more expensive.
  3. Make sure that households are able to keep more of their income against a looming inflation, so that such necessities as food and energy are available to all.  Allowing shortages would generate massive social unrest and disrupt the system immensly.
  4. Take on policies that promote job creation for productive industries, not paper pushing service industries.  Specifically, we must embark on a massive rebuild of the energy, transportation and water infrastructures to use greener approaches.
  5. Limit tax increases to those very wealthy (top 2%) who do not create or support business development which creates American jobs.

I am cautiously optimistic that government can do what is needed.  We will see if they do.  The problem, as always, is the partisan acrimony, special interests and lack of economic intelligence on the part of some in government (clearly in both parties, not one or the other).

Ultimately, as touched on in number four above, the only thing I see that can really jumpstart the economy in a bigger faster way is a massive rebuild of the energy, water and trasportation infrastructures using greener technology.  We need to commit to wind and solar power, at least some new bigger nuclear power plants to replace the aging ones (we need a clean reliable backbone of a power system that does not fade when the sun goes down or the wind is not blowing), a new and improved smart electric grid, electric cars, natural gas powered buses and trucks, new roads and bridges, sewage and groundwater recharge facilities... etc... That rebuild would create long term employment with good wages that would be pumped repeatedly through the economy over time.  Notably, a massive move to renewability would also be safer from a national security standpoint versus importing more energy resources, less expensive long run than stripping our natural resources (as we have been moving towards) and clearly better than polluting the environment more than we already have.

If we do not make those commitments, there is no economic wave that will turn the economy around anytime soon in my opinion.  The wave everybody wants to talk about, international growth, is coming, but that consumer class is a generation away and many nations can only grow so fast due to financial and labor constraints.  Bottom line, I do not care what the talking heads say, we are still in a recession, and without some very forward thinking approaches, it could very well turn into a depression or more likely a multi-dip recession lasting the better part of a decade.  It is incumbant on all of us to push our politicians in the correct directions- which are generally not reserved to the right and left directions.

And Yet, Opportunity

While I again sound dire, hardly the over bullish industry standard, I repeat, there are always investment opportunities for those with assets in 401k plans, IRAs and other accounts.  It is important to be very careful in selecting the investments which fill your accounts however.  Defending your investment account balances is more important than chasing a short term investment return, always.  Remember what you have heard Hall of Fame coaches say for years, "defense wins championships."  From playing good defense, we will continue to have money available to invest in opportunities as they occur.

Generational opportunities are near at hand.  As I said at our investor breakfast a few days ago, I expect market turbulance for years.  That turbulance will be among the best investment opportunities in decades.  Get ready to buy those opportunities the same way that smart investors did in the 1970s.  People who invested in the 1970s did very well in the 1980s and 1990s.

Thoughtfully, cautiously, hopefully and cordially,

Kirk Spano