Given the recent economic activity and volatility in the market, I thought I would provide some perspective on some of the recent news.
On November 28th the National Bureau of Economic Research (NBER, the group primarily responsible for cataloguing economic cycles) agreed as a committee that in December 2007 we reached a peak in Economic expansion*. When a peak is identified it means that we have entered into recession. They define a recession as a significant decline in economic activity that is spread broadly throughout the economy that lasts more than a few months.
The committee measures the economic activity by looking at production, employment, and real income (and other factors at their discretion to determine when the majority of the economy is in decline). While employment clearly peaked in December 2007, other indicators showed a flat to low growth from December 2007 through June 2008. As Brian Wesbury, Chief Economist at First Trust has said, “…it appears that the NBER has said a strong enough decline in one sector of the economy can actually lead to a recession, even if the rest of the economy seems to be doing relatively well.”
I believe they could have, and perhaps should have, called the peak anywhere between January and June of 08 because it was somewhere in that range that the peak of the majority (ie., GDP which didn’t go negative, signifying growth, until the 3rd quarter*; and Sales which reached a peak in the 2nd quarter*) of economic activity occurred.
Despite the interesting call of recession starting at the end of last year, real issues seem to have begun in September, when risk aversion hit an irrational high.
These issues have significantly slowed and almost stopped the velocity at which money is moving through the economy. This is where the credit crisis really began to peak. The government is pumping in money at the fastest rate in history, but as it is being pumped in, it hasn’t been moving. Now we might be seeing some changes to that. Here are comments from Bob Doll, Vice Chairman at BlackRock.
“The next step for the markets is to determine the depth and duration of the economic downturn. Once this happens, we believe investors in riskier assets such as equities and corporate bonds will look over the valley and ignore bad news, helping those assets to post sustainable rallies – but not until the deterioration in the economy stops. The data needs to get better to spark such a rally and we are nowhere close to that, so it seems.
“We believe that, in the coming weeks, global depression fears will begin to peak and confidence will emerge that the deflation-fighting initiatives will have a positive effect on economic conditions. That said, no one knows for sure how the economy, or the stock market for that matter, will behave. However, we reiterate that the October 10 and November 19 bottoms look like a basing process.
“All of the variables to date – fiscal and monetary policy initiatives, the price of oil, lower government bond yields, political change in Washington and now quantitative easing by the Federal Reserve – seem to be working together to arrest the credit crisis, bolster economic activity and put a floor under deeply distressed stock prices. Confidence is the key. If confidence can be rebuilt, stock markets will perhaps anticipate a recovery. Although we are not making a case for it yet, a lot of ingredients seem to be falling into place.”
Like Mr. Doll, I believe that if, and that’s a big if, confidence can be restored throughout our economy and most especially with small businesses and consumers, we can get out of this mess. The money is there, and policy is in place. We just need that money to begin moving.
*www.nber.org *www.bea.gov *www.census.gov
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