Ignoring the Politics of Recession

Over the course of the coming year (the next six months especially) there is going to be a LOT of talk around the possibility of a recession, debate around whether or not we’re currently in a recession, etc. The usual scenario will one of the talking heads and analysts adjusting their predictions of a recession based on one economic event or indicator. We’ve seen it before: a single positive report comes out and the bulls celebrate, then a negative report comes and the bears look smug. The thing is, at the end of the day “recession” is a political designation more so than a financial or mathematical one. The same government that puts out near useless inflation data will calculate economic growth, adjust it for “inflation” and then report the results. However, if their inflation data is off, how can we really be sure that they’re truly reporting positive growth?

Simple, we can’t. In fact, if we look at real inflation vs. the number the government reports and then consider the GDP data, one could argue…

At the end of the day, the reporting of economic growth, the declaration of recessions, etc, are more about confidence than about the real impact on our household budgets, investments and businesses. Yes, a drop in confidence “may” impact those things, but only a fool would base their economic activities on the Govt. declaring a recession (which always happens retroactively anyway) than on the real time economic data around them.

My advice is that people should ignore the talk around recession and focus on their own economic reality. Economic reality is the vast majority of Americans having most of their wealth tied up in their homes and the value of those homes is decreasing, as a result they’re less able to tap their home equity to supplement their income, pay down other debts, etc. Additionally, all households are dealing with higher costs for energy, food and healthcare; whilst some of us can absorb those costs more easily than others it doesn’t change the fact that those costs are higher. Finally if the preliminary data from the past holiday shopping season is any indication, we’re already in a consumer spending recession.

So add up the economic reality: housing recession + consumer spending recession + grocery, energy and healthcare inflation = a recessionary environment at best, a full-fledged recession at worse.

A recessionary environment doesn’t mean you can’t do better this year than last, that you won’t be able to continue to build wealth, can’t continue to grow your business or that you need to tighten up the purse strings to miser levels. However, it does mean that there are significant negative pressures on your household budget, investments, business operations, etc, that you need to plan for.

In other words the political designation of a recession is almost meaningless; people should be focused more on the impact of the current environment on their financial plans, as opposed to how the government is viewing the current economy.

Comments

[VennData:]

Governments don't declare recessions, the NBER National Bureau of Economic Research does. And they use a formulaic definition

2008 Jan 08 11:02 AM

[Markham Lee:]

The NBER isn't a private sector entity, it's a Governmental one. SO sense, it's still the Govt. declaring a recession with suspect data and it lags reality for most people.


-M

2008 Jan 08 11:34 AM