Lessons from the Pros

The Big Picture

While Big Ben may be claiming the recession is over, I wouldn’t be so quick to jump long into the markets. There is still a long road to turn this economy around. Remember, in February 2008, Ben Bernanke stated that the United States would not be going into recession! Nine months later, the recession was officially announced.

The National Bureau of Economic Research (NBER) officially declares the start and end of a US recession. They look at several factors to determine this including: Employment, industrial production, consumer spending, and GDP. If several factors turn positive, then the recession is declared over. The NBER committee that determines recessions and expansions believes that "domestic production and employment are the primary conceptual measures of economic activity." On the NBER website, they still list the current recession as ongoing. As of this writing, we have seen the GDP increase for the 3rd quarter of 2009 by 3.5%. Much of this number has been inflated by government spending programs that ended in October. Worker productivity has increased an astounding 9.5% also signaling signs of life in the economy.

One must take caution, however, and realize the rise in productivity is due to increased layoffs and reduced labor costs. Remember what I said about employment being a major factor of the NBER? Well, unemployment remains high and in the latest report, we climbed to an unemployment rate of 10.2%, far exceeding the economists’ expectations of 9.9%. While the numbers did show a slowing in the number of jobs lost, the number was higher than expectations. Last month’s official government report showed 263,000 jobs lost as opposed to a forecast of only 179,000. Even Goldman Sachs believes the estimate for October of only 173,000 jobs lost was overly optimistic and has called for 200,000. The number came out at 190,000 jobs lost.

To truly come out of a recession, there needs to be a sustained increase in consumer spending, not just government spending. Personal income has dropped 0.7% in current dollar terms. By using 2005 dollars, we have seen personal income drop by 3.4%! Unemployed people cannot spend freely. The consumer confidence number remains low, 66.0 vs. 70.6 for October. Sure retail sales numbers were higher than expected, 1.4% vs. 1.0% expected. However, if you remove auto sales inflated by the government’s Cash for Clunkers program, the core retail sales were a measly 0.2%, half of what was expected. Additionally, inflation expectations are rising. There is even talk amongst the Fed about a possible rate hike to head off rising prices.

The thing to remember is that at the official end of the last recession, November 2001, the S&P 500 was trading at 1139.45. The Dow closed the same month at 9851.56. The lows of both markets were reached nearly one year later in October 2002, S&P 500 – 768.67, and Dow – 7197.49, for a decline of 33% and 27% respectively. That was after the official NBER declaration of the end of the recession. They have not declared this recession to be over yet!

Have a great day.

- Brandon Wendell bwendell@tradingacademy.com