GDP and Unemployment Show We Are In A Recession
Posted on: August 4, 2008 - Email Article - Printable Version
One of the most heated topics of debate in all financial news publications over the past few months is whether or not the United States is currently in a recession. This obviously is not the easiest thing to predict as there are so many factors that go into the determination of whether or not we are in a recession. The National Bureau of Economic Research (NBER), the organization that officially comes out and says we are in a recession, defines a recession as “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.” After looking at the GDP and unemployment data that came out this week and combining it with what has been going on in the economy for the past few months, it is my opinion that we are currently in a recession that started at around the end of 4Q 2007. It is important to remember that we never find out we are in a recession until it is nearly complete so lets examine the numbers and see how they show this.
GDP
On Thursday GDP for the second quarter came in at a growth rate of 1.9%, lower than analysts expectations of 2.3%, even with one of the largest tax rebates ever. The bulls claimed that an inventory draw down of $62 billion was what caused GDP to grow at a slower pace, but if you think about it logically this means that even with heightened demand due to the stimulus checks they did not want to increase their inventory going forward because of what is going to happen after there are no more stimulus checks. Not only that but, next exports accounted for about 84% of the growth in GDP (2.4 percentage points), showing that outside of exports, the economy contracted. Given the fact that the dollar has gained a little bit of momentum and as conditions continue to worsen in the UK and throughout Europe and Japan, there could be a significant drawback in exports in the future. Import volume also declined 6.6%, which is very recessionary.
Also very concerning about the GDP report was the fact that all annual revisions going back from 2005 were revised down, which would be another reason to not put too much stock into that 1.9% growth number as it is likely to be revised in the future. For all the pundits that have said GDP is not declining, hence we are not in a recession, think again. The 4Q 2007 GDP growth rate was revised from a positive reading of 0.6% to (-0.2%), which means that if they revise the 1Q 2008 GDP into negative territory, it would signal a recession.
Unemployment
Unemployment is what poses the greatest concern to me and is also what I feel is the clearest indication that we are in a recession. Jobless claims climbed to a five year high to over 450,000, a number typical of recessions. If you take a look at where jobs were declining last month it is in sectors that typically lay off workers during a recession; the sectors were construction, manufacturing, retail and business services. Healthcare reported an increase, as did mining due to high demand for oil and gas extraction and its supporting services. The average number of hours worked per week by non-farm payroll workers also fell by 0.1 hours, continuing the trend of lower average number of hours. If people can not work more hours to earn their wages, they will continue to see significant deterioration in their income and will be inclined to save more.
The unemployment rate also jumped to 5.7%, above analysts expectations of 5.6% and above May and June’s rate of 5.5%. If you look at the graph you will see that unemployment has never taken such a significant upturn without resulting in a rec
ession. The areas in gray are recessionary periods. See a trend? There has also never been a recession that has had an unemployment rate lower than at least 6%, so I would expect to see the unemployment rate continue to rise as companies are continuing to lay off workers and decrease hours as cost cutting measures in this tough environment.
With lower employment, lower aggregate hours worked and jobs declining in sectors that perform poorly during recessions, unemployment is clearly pointing to a recession. These figures would point to lower retail sales, industrial production and real income, which would lead to a lower GDP, which would satisfy all the conditions necessary for the NBER to declare a recession.
Other Factors
There are also other factors hindering the growth of the economy: deteriorating credit markets, a continued decline in housing, decelerating consumer confidence and volatility in the commodity markets. With financial firms continuing to experience problems and write downs, which are hopefully over, the recovery of financials still seems a couple of months away. The housing market continues to decline as rates and defaults rise, median home prices rose and sales decline. Consumer confidence is constantly hitting new 10 and 20 year lows, but that could turn for the better with lower oil prices. Overall there are many things straining this economy right now.
One thing you will notice that I did not mention above was inflation as I feel the recent pullback in oil prices has lowered the inflation strain on the economy. Do not get me wrong it is still there, but I think it is an overblown problem, which should be under control within the next few months. That being said, with the Fed meeting this week, I would react negatively to an increase in rates to curb inflation as that would destroy the financial and housing markets as they are trying to pick up the pieces from their worst crises since the early 1990’s.
Impact on the Equity Markets
So with all that said, how does this effect the stock market? Keep in mind that the stock market leads the economy by about 3-6 months and that the average recession lasts about 10 months, the longest one being 16 and the shortest being 6 months. Let’s assume that the recession started at the end of 4Q 2007 or beginning of 1Q 2008. I believe that this recession should last longer than the average recession with the multitude of problems affecting the markets, so I would say that the recession could be over by the middle of 1Q 2008. That would mean that the equity markets would bottom in around October or November. While it is definitely possible that they have already bottomed, I feel that this recent rally has just been another bear market rally and we should test the lows again and then move sideways from there. That being said I reiterate my stance of staying in traditionally defensive sectors, like Consumer Staples and Healthcare, as the lack of stimulus checks will weigh on discretionary stocks in the next few months. It could be a rough couple of months ahead, but I would expect to see the light at the end of the tunnel during the beginning of 2009.
-Vinay Ayala
Comments
I’d have to say the picture isn’t good but overall GDP is still positive. Yeah, its bellow expectations but still positive. There is hope yet Bernanke might have done something good to prevent a catastrophe.
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