"What is the good of being a genius if you cannot use it as an excuse for being unemployed?" Gerald Barzan
Today's announcement by the business cycle dating committee that United States has entered a recession late last year shouldn't have surprised anyone?! Except it actually did!? Despite all of the media speculation about the official start date being the third quarter of 2008 because of the "two negative quarters rule", NBER has confirmed what I and many others have said many times already- we have been in a recession for almost a year now!
"The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months"
The main remaining question now is simply trying to determine how long this recession will last? I personally believe that GDP will likely contract all the way through July-August 2009 and will start flattening out around the later part of Q3 2009. I picked this date for many reasons, with the main one being the fact that y-o-y comparisons for virtually every sector of the US economy will get much easier around late July 2009 and CPI (price levels) should also help a lot, which will likely lead to the real GDP flattening out around that time before resuming a below trend growth. I also believe that we will start seeing the first real effects of the upcoming stimulus plans around the world, not earlier than third quarter of next year due to the political and implementation lags.
"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.
Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.
The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then"
This also means that unemployment rate could reach much higher levels than 7-8% currently projected by most economists and the media, as payroll tend to shrink for at least several quarters beyond the "official recession end date"
"Q: What about the unemployment rate? A: Unemployment is generally a lagging indicator, particularly after the trough in economic activity determined by the NBER. For instance, the unemployment rate peaked 15 months after the NBER trough month in the 1990-91 recession and 19 months after the NBER trough month in the 2001 recession. The unemployment rate (which the committee does not use) tends to lag behind employment (which the committee does use) on account of variations in labor-force participation"
Given the fact that S&P has posted one of the worst declines in history today, it seems as if many of the market participants haven't yet discounted the upcoming "bad payroll and recession news". And while today's decline was somewhat expected due to the month-end mark up performed last week, I was still somewhat surprised by the magnitude of it, and thus while my twelve months S&P target expectation is still unchanged at 850+/- 50 points, I am now only buying individual stocks by selling puts instead of making outright purchases...
Stay safe out there; I will post several links and excerpts from two of my most recent Motley Fool articles, including some screener generated ideas in the industrial and technology sectors during the next few days.
