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Saturday, August 25, 2012

No Recession Now - But When?

There have been a few calls as of late (Hussman, ECRI, Shilling) stating that we are currently in the next recession. Then there is everyone else. While the "optimistic" outlook is always more enjoyable to listen to - the problem is that the current "no recession" view is primarily predicated on current quarter growth rates looked at in isolation. These data points are then extrapolated into continuous future economic expansion. For example, in the 2013 CBO Budget the average economic growth rate used is 5.28% which is substantially higher than the 2% growth rate currently projected by the Federal Reserve. More importantly, neither the Fed, or the CBO, have forecasted a recession in future years. All assumptions are based on the expectations that somehow recessions have been repealed. This is hardly the case.

However, the no-recession camp is currently correct. The domestic economy is not currently in a "technical recession," as measured by Gross Domestic Product, as the economy is growing at a 1.5% annualized rate in the second quarter. However, there is a mistake being made by many of the no-recession calls. Most of the assumptions are based on looking at the individual current data points of consumption, incomes, employment and production. The assumption is that since the data is not currently negative then a recession is not imminent. However, as investors, we should not be concerned with what is happening "imminently" but rather what the macro environment will look like six months from now. As we have often stated, it is not the individual data points that are important - but the trends of the data that tell the real story. Economic change happens at the margins.


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