The National Bureau of Economic Research (NBER) announced recently that the U.S. economy is officially in a recession, and it began December 2007. If you are like me, I am glad it has been confirmed; otherwise, I was doing all of this research and worrying for nothing!
In reality, this is important information; and in the scheme of things, many have found a silver lining in the news. The average U.S. recession lasts 17 months. Since 1854, there have been 32 recessions with the longest lasting 65 months. It occurred in the 1870’s. The ‘Great Depression’ lasted 43 months. Only two other recessions lasted longer than two years, and they lasted 32 and 38 months. Since most recessions last less than two years and we have been in this recession for one year, many analysts as well as economists are anticipating a recovery to start in 2009. As I have said before, we need to make sure another shoe doesn’t fall anytime soon.
Here is a little more information about the NBER. This organization was formed in 1920, and is private, nonprofit, and nonpartisan. A copy of the report that was issued about the current recession can be found on their website: wwwnber.org. There have been 31 American Nobel Prize winners for Economics, and 16 of them have been researchers for NBER. Also, six of the past Chairmen of the President’s Council of Economic Advisers have also been researchers for this organization. It has a committee that is responsible for the tracking of business cycles in the U.S. This committee made the determination of our current recession.
Should you elect to read the report, you will find the committee reviewed a variety of data during the past year prior to determining the recession started in December 2007. Many quote the definition of a recession as the decline in Gross Domestic Production (GDP) for two consecutive quarters. This really is not the definition but is more a rule of thumb. In most cases, if the U.S. economy’s production declined in two consecutive quarters, we would be in a recession; but, not every recession has two consecutive declines in GDP.
The NBER’s definition of a recession is as follows: “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.”
Once we have made our way through the trough, our economy will once again be in an expansion. But, this is one of those events you cannot confirm until you can see it in the rearview mirror. This is another reason the investment markets always move in advance of the announcements.
In addition to potentially being significantly through this recession, the full impact of all of the Government’s actions has yet to be felt. Plus, President-elect Obama has promised a second stimulus package of significant size that it will ‘jolt’ the economy. While the details of the next stimulus has not been released, I believe there will be a segment shoring up housing prices and as well as encourage spending. It will be important for the next stimulus to be supported by actions in others countries as well, since the world’s economies are so intertwined.
While the trough of this recession may occur in our near future, the bottom of the financial markets may be near. If you recall, the S&P 500 index reached it peak in October 2007 at 1,565.15. Since then, we have experienced many attempts at a recovery, only to see the index fall again. During the last sixty days, it appears this index is trying to put in a bottom. Presently the lowest close was on November 20th, at 752.44. There is no guarantee this low will hold since the auto industries may cause more harm to the economy. And while General Motors submitted a plan to Congress this week, it is impossible to say whether they met the expectations of Congress. If not, the bankruptcy of GM and perhaps Chrysler may be in the near future. Will this action be the ‘next shoe to drop’? It is hard to say. Clearly, it should not be a surprise. Concern may be created though in the markets due to the potential downstream impact. Just like a house, there are many components to a car and the number of businesses touched by any changes in this industry will be significant.
It is still prudent to be cautious. However, the markets can move quickly in either direction, and I suspect this will continue for some time. For assistance with investments, financial and estate planning, contact a Certified Financial Planners (CFP).
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.