No Recession? Bunk!
Does anyone still believe in the economic data being churned out by the federal government? From MarketWatch last Thursday:
Brian Pretti, chief investment strategist for East Bay-based Mechanics Bank, has one word for those who keep saying the nation is not yet in a recession: “Bunk.”
“We are still wringing out the excesses of the financial sector,” Pretti says, “and not only is the period of reconciliation–or deleveraging–not over, but we will be living with it for some time to come. We’re in a recession; there’s no other word for it.”
Then why don’t the numbers tell the story?
“Officially, a recession is defined as two consecutive quarters of negative, inflation-adjusted, gross domestic product (GDP) growth. But if you use the wrong inflation assumptions (called the deflator in the GDP reports), the conclusions are wrong, too.”
To illustrate, Pretti points to recent deflator factors used by the Fed to estimate GDP. “For the first quarter 2008, it was 2.7%, for the fourth quarter 2007, 2.4%, and 1% for third quarter 2007,” he says. “Where did the government come up with those numbers that are quite different than the CPI numbers? Since September 2007, the price of crude oil is up 100%; retail gasoline up 69%; natural gas 95%; and the Commodity Research Bureau index for foodstuffs is up 27%. The true nature of inflation in the US has been anywhere between 4-5%, and that means we’ve already been in a recession for a number of quarters.”
The year-over-year inflation as measured by the Consumer Price Index rests at 4.9% as of the June report, which was released yesterday. It highlights Pretti’s point–and calls into question the prior figures that have been used. “No wonder the financial markets aren’t buying the idea that the economy is ‘holding up,’” Pretti says. “Their negative behavior is telling us headline GDP numbers may not exactly be reflecting reality!”
Source:
“Wishful Thinking Aside, It’s a Recession, Folks”
MarketWatch, July 17, 2008
July 21st, 2008 at 8:06 pm
Recession = Two (2) quarters of negative GDP. We may well see this happen in Q3 and Q4. 2H of 2008 will be interesting to say the least.
July 22nd, 2008 at 10:21 am
Thanks for the comment Ames.
“2H of 2008 will be interesting to say the least.”
Personally, I think the first half of 2009 will be more telling regarding the strength of the U.S. economy. By that time, a number of bailouts in the pipleline (Fannie Mae/Freddie Mac, housing, 2 tax rebate checks, etcetera) would have come and gone. We’ll have a pretty good idea where we stand then…
October 4th, 2008 at 3:54 pm
How about now?
Fact is that many times a recession is not confirmed by the stats until we are on the way out of it.
With the credit crunch as bad as it is now, chances are we are in a recession. Who cares what they call it six months from now.
October 5th, 2008 at 10:50 am
Thanks for the comment Gil.
“Who cares what they call it six months from now.”
How ’bout it…