Wednesday, June 11, 2008

No Recession Today, Thank You

Over the weekend I had a public disagreement with a friend over the economy. We both agreed that a recession is two or more quarters of negative growth as measured by GDP.

Facts are facts.

The economy grew slowly in Q4 of 2007. It grew very slowly in Q1 of 2008 (Just last week the adjusted rate was posted at .9%).

This quarter's growth is expected to be even smaller. But it is expected to be growth.

No matter how small the positive number, growth is growth.

We haven't had one quarter of shrinking GDP, let alone two.

I understand that gas prices are high and unemployment is up. But despite the hangover of the housing "crisis," there's good news.

The Fed lowered interest rates and that will work it's way into the economy over the next few months.

Overall, GDP growth for the year will be small -- maybe 1 or 2%. But it's not shrinking. Growth is growth.

The government stimulus package is kicking in. People are getting their "rebate" checks and spending them. That will help us all a bit.

And the silver lining of a weak dollar overseas is that U.S. exports are doing very well.

I am not an economist, but these facts are not hard to come by. You have to open the paper and get past the story about what Britney and Lindsay did yesterday.

Our economy is going through a period of weakness and slowness.

We are not in a recession.

Here's the silver lining on slow jobs growth: When companies put off hiring, they find ways for their current labor force to do more with fewer people. So while they're waiting for the orders to increase to the point where they can hire more people, the productivity of their current workforce goes up.

So the remainder of 2008 will see an increase in productivity. Watch the business web sites and look for that keyword: productivity.

Here's the silver lining on high gas prices: They're keeping inflation down because people don't have money to spend like drunken Congressmen.

Aside from oil and transportation, "core" inflation is about 2%.

And the silver lining on gas? Well, there are two points here. First, if you drive a midsize mobile like mine, it costs about $25 more per tankful than it did a year ago. When the government gives me $500 to spend, that's 20 weeks worth of the difference. So, until gas settles down, the government stimulus is actually helping us weather this storm.

Second, invest in oil-related companies. Exxon is doing well. Invest $1,000 in Exxon and it will help you feel better at the pump! Schlumberger is up about 100% in the last year. Give that a try.

I'm not saying things are rosy. But let's keep a little perspective.

The economy has slowed down. But it hasn't stopped and it hasn't gone into reverse.

Slow growth is growth.

Growth is growth.

Now, here's the ultimate silver lining: The only economy you have to worry about is your own personal econo-sphere. See "We're Opting Out of the Recession."

4 comments:

  1. Erick Simpson6:14 PM

    Hi Karl - Baba Ganush here. I don't think we had a public disagreement moreso than I think you corrected a statement that I made during my keynote at the ICCA which I believed to be accurate - thank you. I quickly agreed with you on the technical definition of a recession, as illustrated on the slide I had up at the moment.

    The core issue here isn't about nitpicking a percentage of GDP growth (frankly a .9% figure is truly embarrassing, even to support your point, by the way), but what the environment feels like. You know, like "it's only sixty degrees, but with the wind it feels like forty".

    We may not technically be in a recession, but the Service Providers and MSP University members I speak with every day are feeling the pinch. Sales cycles are growing longer, projects are being put on hold, and its tougher to get in the door of new prospects.

    You're in California just like me, so you're no stranger to the $4.75 gallon of gas, nor are you unaware of the horrible housing market out here, which is at its lowest level since 1993, with foreclosures at their highest since record-keeping began in 1979. And I don't need to throw in that consumer spending has posted its smallest gain since 1991 (I can hear you now - a gain is still a gain! lol).

    I gotta tell you, Karl, we may not be in a recession, but for a lot of service providers and the smb business owners they serve it sure feels like forty degrees...

    Erick Simpson
    MSP University
    www.mspu.us

    ReplyDelete
  2. So Erick cross-posed here and at his blog (http://mspu.typepad.com/weblog/2008/06/a-response-to-k.html).

    And there are many good comments.

    Just to clarify. Erick's position is that I'm 100% correct, but a slowdown still feels like a slowdown.

    I'm not saying we're in the middle of boomtimes here.

    But Erick started by using the widely-accepted definition of a recession (two consecutive quarters of shrinking GDP) and then assumed we're in a recession.

    We're in a slowdown.

    Look up legerdemain.

    If you want to create your own definition of a recession and then run with that, by all means do so. But don't go with the standard definition and then ignore the fact that, according to that definition, we're not in a recession.

    If you're going to argue with facts, just remember:

    Facts are rudely indifferent to opinions.

    ReplyDelete
  3. Anonymous3:56 AM

    The legerdemain you're talking about is what the Federal Reserve are doing with interest rates and bail out of Bear Stearns.

    Without this intervention there would most certainly be a recession.

    The problem with facts is that facts are binary. One day they're true (pre July 21, 1969: man has not walked on the moon) and the next they're false. But you're right, they can trump opinion.

    ReplyDelete
  4. Ryan Meyer3:02 PM

    I have to respectfully disagree with your post.

    First, GDP growth numbers are adjusted, so following the strict definition is irrelevant. Using the government's data on year-over-year inflation growth rates instead of chain, the recession began in Q4 2007 and the last three quarters produced negative real G.D.P growth rates.

    Second, there is no consensus that the housing "crisis" is over, so hangover is an inappropriate term.

    Third, lowering interest rates increases inflation and decreases the overall value of the dollar. It's a quick fix, especially for wall street, but detrimental in the long term.

    Forth, The stimulus package, at the very least, is highly controversial. I won't say more.

    Fifth, The flip-side of US exports doing well is higher cost of US imports.

    Finally, High gas/oil prices do not "keep inflation down." The price of oil and gas is coupled with the rest of our economy, because everything we produce and consume requires oil or gas in some manner.


    Basically, core inflation is not anywhere near 2%. Real world analysts estimate closer to 12%. See point #1.

    The only good news here is that the rest of the world didn't decouple from our economy like they expected to. I won't go into a detailed explanation of why this is good news, but essentially it means that the dollar isn't going to collapse.

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