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Is This a Recession?

July 31, 2008 by Thomas Mullooly

Sometimes, trying to get your arms around a gigantic number (for example, the area of earth covered by land) just takes time. So it’s no surprise (to me) this week the Commerce Department announced “oh by the way, remember three quarters ago… the fourth quarter of last year? Well, we didn’t know it at the time, but the economy actually contracted during the fourth quarter of last year. Sorry!”

The Commerce Department originally released their GDP (gross domestic product) estimate for the fourth quarter in January. At the time they reported a 0.6% increase for the 4th quarter last year. But when the dust settled — now six months later — we learned that this “positive number” was actually wrong. Fourth-quarter growth came in at -0.2%. Oops.

The definition of a recession — as in beaten into my brain, by my economics professors in college — is two consecutive quarters of negative growth in the economy. Today, CBS Marketwatch is attempting to tell us a different definition. They wrote “It’s a common (but mistaken) belief that a recession is defined by two consecutive quarters of negative GDP. The actual working definition is “a significant decline in economic activity lasting more than a few months,” usually seen in GDP as well as monthly data on job growth, income growth, industrial output and business sales.”

My reply: “whatever!”

A couple of thoughts popped into my mind when I saw this revised GDP report.

First, trying to accurately calculate the growth in any economy is a very large and complicated task. Trying to get an accurate number within four weeks of the end of the quarter is nearly impossible. It’s like trying to calculate the area of earth covered by land — it’s an extremely large project.

Second, do you really need the Commerce Department to tell you the economy is slow? I listen to my clients. What else do I need? I have found, over 25 years, that my clients are a better indicator of what’s happening in the “real world” than any talking head on TV or the bean counters at Commerce Department.

Third, I am unwilling to accept any prediction about what will happen with the economy. We might as well talk about the weather — or the NY Mets. And it’ll be a lot more interesting.
Remember, predictions = opinion. Do we need more opinions?

So — tell me — what are the chances the Commerce Department will revise the first quarter, second quarter and possibly third quarter GDP numbers down?

I’d say the odds are pretty good. I would also add something else: it doesn’t matter. And this is where the lesson comes in, boys and girls.

Like I have written (in previous posts) when discussing buying/selling stocks: if you wait around for the final tally (or if you wait for the story to be printed in the paper) to make your decision whether to buy or sell, you will lose.

You’re essentially guaranteeing that you will be the last person on earth to know, or acknowledge, a problem. A lot more people have a lot more information than I ever will. So, when we see people lining up to sell a particular stock — or dump an entire sector (as we can see clearly with these charts), do you think we should wait around? Or stay involved because some economist tells us to?

Don’t rely on the news, for your news. It’s all info-tainment.

The first tip I usually give a new client is this: turn off the TV and stop reading the papers. Don’t ever forget: everything written on Wall Street has an agenda behind it.

And that agenda usually doesn’t include you.

By the way, the area of earth covered by land: 57,268,900 square miles.

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Filed Under: Asset Management

About Thomas Mullooly

Thomas Mullooly is owner and founder of Mullooly Asset Management, Inc. In 2002 Tom opened Mullooly Asset Management, a fee-only investment advisory firm. As an investment advisor, and not a broker, Tom works strictly for his clients. With the help of point and figure charting, Tom builds a realistic game plan for clients.

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Wall Township, NJ 07719

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The information on this website and blog do not involve the rendering of personalized investment advice. A professional advisor should be consulted before implementing any of the options presented. None of the content contained in this website should be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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