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MAKING CENTS OUT OF THE NEWS
Blog #41
(October 29th, 2009)
RECESSION, ALIVE OR DEAD?
By Tom McAllister, CFP®
The big economic news is in, echoing what I've been saying in my blog since May, namely - THE RECESSION IS OVER! In fact, according to recent headlines, the recession has been over since June. What's more, as a recent government report reveals, our economy grew at a 3.5% rate in the calendar quarter ending September 30. Even though I've been repeating since spring that the economy has bottomed and is on an upward track, it feels good to have my perceptions affirmed in the press.
Have you noticed? Here we have two very positive pieces of news: the end of the recession and the signs of growing economic activity. But, as even as the media report the good news, in virtually every instance they follow that news with gloomy remarks, reminding us how bad things still are in the employment arena.
I continue to caution readers again and again - unemployment is a “trailing indicator”. That means unemployment is at its worst point months after the economy turns upward. The better business journalists have joined me in pointing this out, but unfortunately these are in the distinct minority. The majority of journalists, and, I would venture to say, all of the non-business journalists, continue to focus on the unemployment numbers, gloomily predicting these numbers will remain poor for years to come. An Associated Press report this week had an optimistic opening statement: "More than 80 percent of economists believe the recession is over and an expansion has begun". , The following sentence, though, was predictably less rosy: "They expect the recovery will be slow as worries over unemployment and high federal debt persist". To this I say, "Maybe, maybe not". What is important to remember is that unemployment will not, indeed cannot, recede until the economy grows again. Happily, growing is just what our economy has begun to do.
News that the recession is over is reaffirmed by the sharp increases in the stock market over the past eight months. It is reaffirmed in the recovery of corporate profits and in the expansion plans being made by businesses both small and large. Small business owners, as I discussed in last week's blog post, are the more hesitant in their planning. That's because small business is concerned about potentially negative actions by the Obama administration and by Congress. Prospects of higher business income taxes, mandatory health care cost increases, and heavier regulatory burdens, even the loosening of requirements for voting in a union, are all cause for concern by these small business “economic engines of recovery”.
The Associated Press story added two more positive notes: "Forecasters expect 2010 to be the first year since 2005 that the housing sector will contribute to overall growth" and "Inflation is expected to remain low…with improving credit markets". Forty-four economists surveyed in September expect the federal funds rate to remain at its current record low near zero until late spring, before a gradual rise begins.
The only organization that can officially declare the beginning or the end of a recession is the National Bureau of Economic Research. The NBER, however, doesn't make any pronouncements until months after the fact, in order to take into account final readings of various economic measures. In the meanwhile, I plan to dust off my rose-colored glasses, accept well-deserved kudos for having seen the good times coming, and get to work taking advantage of the investment opportunities to come.
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