The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

More Precise Questions

10/20/2019

The most common question asked of economists is . . . “are we going into a recession?”  The answer is yes, of course — because there is always a recession somewhere in our future.  The question they’re really asking is . . . “when will we feel the pain of a recession.”

Economists have very technical definitions of when recessions start, but the most commonly used definition is . . . two consecutive quarters of negative GDP growth, which means two consecutive quarters of a shrinking economy.  In other words, we are not officially in a recession until the economy has already shrunk for at least six months.

A year ago, the economic data points were uniformly positive but no longer.  Most economists point to the strong consumer who will hold up the economy, because they currently enjoy low unemployment and slightly rising wages.  That ignores that consumer confidence has flattened, business confidence has been declining, and the manufacturing sector is already in recession.

If the recession has already started, it won’t be recognized and acknowledged before next Spring.  Unfortunately, that’s during an election year.  Fiscal policy is controlled by Congress and the President, which could briefly stimulate the economy with even more deficit spending, but any agreement between Congress and the President is unimaginable.  Monetary policy is controlled by the Fed, and lower interest rates will do nothing to help.  A booming international economy could theoretically help pull the U.S. economy up, which would be a role-reversal, but I have little hope of that.

Economists see long-term value in recessions, as consumers and businesses are forced to “tighten up” their financial health and business practices.  This is a good thing for long-term economic health.

Unfortunately, most investors look forward to recessions with fear and loathing.  That’s like dreading a big sale at your favorite store.  Modestly increasing cash-like investments in a portfolio, like negotiable certificates of deposit, is something to consider for bargain-shopping investors.

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