Is the Recession Really Over?

News pundits are hailing the end of the Great Recession.  The numbers have come out, and the American economy has grown again.  What does this mean for our friends and our families?

The metric the Government uses to measure the economy is called Gross Domestic Product, or GDP for short.  GDP is defined as the market value of all final goods and services that a country makes in a given year.  By tracking this number, Government statisticians can figure out whether or not the economy grew in any given period.

There are a few basic problems with GDP that should preclude us from taking the number at face value.

First, it is a complex calculation, and is most often revised after it is originally released to the press. What may be a positive number, upon release, may be a negative number three months later.

Second, the inputs of the GDP

(Consumption + Investment + Government Spending + Net Exports = GDP)

make it a number that is easy to manipulate.  Retail sales and investment (excellent measures of “business”) may fall off a cliff, but GDP may go up. By taking on debt and spending money, the Government can easily manipulate the number higher.  For example, the most recent GDP number would have been much lower if it hadn’t been for the new home buyer subsidies and cash for clunkers program.  Keep in mind, both of these stimulus programs were funded with debt (and/or printed money), and will have to be repaid in the future through higher taxes and/or inflation.

Third, I can’t pay my bills with GDP growth.  As stated above, GDP may reflect the Government taking on debt and handing out money, as opposed to real business activity.  The cost of this debt will be a future drag on profits, incomes, and growth.  It is important to remember that the Government does not make and sell things for a profit.  The Government’s income is derived by taxing business, taxing incomes, and taxing transactions (i.e. capital gains, sales tax). Therefore, a bigger GDP number obtained by increased Government spending may mean less income for you and me in the future.

Since most of us get our paychecks by working at or owning a business, why don’t we look at measures of business activity instead of GDP?  If business does well, people are hired and paid.  Tax collection goes up as well, as profits are taxed and people have more money to spend on goods and services.  If business declines, people make less money and get laid off.  Obviously, tax collection also suffers under these circumstances.

For a quick and dirty look at business activity, we decided to review the sales results of a handful of companies in the shipping industry.  Most of us buy and consume products that are made somewhere else.  Whether we buy things at a store, or online, shipping is involved in the process of bringing producers and buyers together.  If business is up, then sales of a diverse group of shippers should rise as well.

We chose to look at the following companies’ sales growth in 2009, as reported in their SEC filings and/or press releases:

Overseas Shipholding Group:  – 35.11 %

Expeditors International:  – 34.23 %

UPS:  -15.22 %

Burlington Northern:  – 24.26 %

Using our quick and dirty shipment method, we can see that sales are down significantly from 2008 levels.  This means that business activity is down, and therefore incomes must be down.

Now lets look at GDP growth for the first nine months of 2009, and compare it to the first nine months of 2008, using numbers from www.bea.gov:

GDP Growth: 2009 (through third quarter):  -2.38%

What we can tell from our little exercise is that movement of things has slowed down a lot more than GDP. Since most incomes (personal and Government) ultimately come from business revenues, and not GDP, we can see that things are quite a bit worse than they were a year ago.  Given that businesses are still announcing significant job cuts, I’d expect that spending won’t come rocketing back in the near term.  We will ultimately reach a bottom in the Great Recession, but as investors, we need to focus on the fundamentals, not Government hype.

Matt Marcewicz

November 6, 2009