Bringing Down the House?

Does a dip in the economy mean we’re headed into a recession?

Normally the answer would be: maybe. The popular definition of a recession is two successive quarters of negative economic growth. Having one negative quarter—even if only by a measly -0.1%–means the chances of a second negative quarter are that much higher. After all, if you’re dealt an ace as in your first card in blackjack, your chances of getting twenty one are a lot better.

But the economy isn’t a card game. While it’s true that unexpectedly low growth usually increases the chances of recession, the composition of economic growth matters. While investment, which constitutes roughly 10% of the economy, declined last quarter, personal consumption actually went up—especially of durable goods, like cars, or washing machines. Also, the decline in investment was led by a $40 billion decline in inventories, a volatile component that often reverses itself. For example, a 1.1% decline in inventories in the summer of 2011 was followed by a 2½% gain the next quarter.

Moreover, net exports were also an economic drag in the latest report, estimated to have fallen by some $30 billion. But that item is a rough estimate, initially. The Commerce Department has to guess what the final month’s data will be. Up until now the trend in trade had not been good. But December’s numbers turned that trend around. Based on that report, GDP is likely to be revised higher, possibly turning a slight negative number into a small positive.

The economy hasn’t been strong, and we face some real headwinds: anemic bank lending, weak employment growth, and structural deficits. But like the guy in the Monty Python skit, it’s not dead yet.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2017-07-17T12:34:42+00:00February 11th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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