Are we in a recession? The answer to that question depends on who you ask...
Does it really matter if we know, by definition, that we are in a recession? Do we need the National Bureau of Economic Research (NBER) to officially say, "Yep, the U.S. Economy, as measured by growth in Gross Domestic Product (GDP), has been negative for two consecutive quarters; therefore, we are now in a recession. You may now worry about your money and jobs accordingly," before we alter our behavior or attitudes in our personal lives?
I am certainly no economist so perhaps someone can help me here...
It would seem that close analysis of macro-economic trends to gain some form of truth or insight into the direction of financial markets is rooted a bit too deeply in reality where reality does not factor into the big picture equation.
"The market can remain irrational longer than you can remain solvent." ~ John Maynard Keynes
Here's where I need some help or, perhaps, your feedback and even anecdotal observations of recession in your life:
- Perception is reality and it can not be quantitatively measured. Financial market movements are defined by the behavior of its participants. This herd behavior will move on its collective perception of reality, and does not take its behavioral cues from quantitative reports.
- Financial markets are not, to say the least, always rational. People spend more when they feel wealthy and spend less when they do not; Investors pile into stocks when prices are higher and jump out when prices are lower; and our human perception of risk is lowest when real risk is highest and vice-versa. This behavior is not rational (insert your example of historic booms and busts in financial markets here).
- The average Joe and Jane on the street do not behave according to Government reports. I believe those who have lost jobs and are having difficulty finding a new one believe we are in a recession; I believe people who are stealing gas believe we are in a recession; and, despite what the out-of-touch politicians think, average Americans suffer in times like this, recession or not.
- What do we do with the information, anyway? Whether or not we are in a recession, what are we to do with knowledge of the truth? Do we change our investment portfolio? Do we change our personal spending habits? Why or why not?
The economy is complex and there are many factors involved, such as food, energy and commodities prices, currency valuations, job creation, inflation, and the list goes on. But who really looks at the macro-economic data and reports and bases any significant financial or personal decisions on that information? Why or why not?
I would love to know your thoughts: Can you help me by answering any of my previous questions? What signs of recession (or lack thereof) do you see where you are? Do you feel the economists and politicians are so disconnected from daily life, such as buying groceries and pumping gas, that their own perception of reality is flawed? Does reality really matter if people's perception defines their reality anyway?
Through a prudent investor frame and in the spirit of Keynes' Beauty Contest, is it not wise to think how the judges will think rather than what YOU think? As with beauty, is recession in the eye of the beholder?
TFPAuthor, Kent N. Thune, QPFC, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' financial planner and Registered Investment Advisory firm located in Mount Pleasant, SC.