Issue 14 • March 4, 2009 Economy Falling Off a Steep Cliff
Upon further review, government bean counters decided our economy contracted nearly TWICE as much in the last three months of 2008, with GDP plunging -6.2%, instead of the -3.8% decline originally reported.1 The key components of the sharp decline were no surprise. Residential fixed investments (i.e. housing) fell at a yearly rate of -22.2%...and consumer spending plunged at a rate of -4.3% annually, which doesn’t sound like much, but in an economy where 70% of the total GDP depends on personal consumption, it’s HUGE! In fact, consumer spending is suffering the steepest contraction since 1951.2
It seems to me that too many investors have grown too complacent about the economy’s outlook. The majority of economists, in fact, see a strong second-half recovery this year, with the median forecast suggesting an expanding economy by sometime in the second-quarter of 2009, beginning in July, and a return to GDP growth 1.6% by the fourth quarter.3 It is assumed that the $787 billion fiscal stimulus plan, plus more budget-busting deficit spending by the Federal government (including more bailout money for banks and homeowners) will be enough to quickly turn our economy around by mid-summer. Perhaps, but I wouldn’t bet my bottom dollar on such an outcome. There’s plenty of “supporting data” on the economy that, like the recent GDP report, shows we are suffering through the worst economic contraction since the Great Depression:
The trouble is that there are some eternal optimists on Wall Street, in Washington and elsewhere, who need to take off their rose-colored glasses. Their upbeat forecasts just don’t match the harsh reality in the data. And this disconnect only sets the market up for more disappointment down the road if the fabled second-half recovery fails to materialize. And even if the economy does miraculously bounce back later this year, it may be the cruelest joke of all. Do you remember the term “double-dip recession” from the 1980s? In fact, Japan struggled through a whole series of recurring recessions during its “lost decade” in the 1990s. The U.S. economy may be fated to follow a similar pattern of false starts and dashed hopes for years to come At Weiss Capital Management, we were ahead of the curve early last year in predicting that a recession had already started. When officials finally announced last December that this recession began a full year ago, in December 2007, we were not surprised.
All of us have experienced recessions before, but for MOST of us, these economic contractions were relatively mild over the past 50 years or so. The typical recession since 1945 lasted just 10 months on average. The current recession has already lasted 15 months and counting; meaning we’re already 50% above the norm in terms of duration.7 If you crack open the economic history books and look at the full record of data going way back to the 1850s, you’ll see that recessions typically lasted much longer: 18 months on average. Many contractions, especially during the 19th century, lasted even longer.8 Could this recession be over by July? I seriously doubt it. Nevertheless, it’s better to prepare your investments for more trouble ahead. Until the housing and financial sectors show signs of stabilizing, the economy may not fully recover. And even when a recovery does arrive, it could be barely recognizable considering the amount of damage that’s been done to America’s collective wealth...and lost confidence. Good investing,
P.S. We can help you navigate today’s difficult economic and investment climate with confidence. If you have investments of $250,000 or more, we invite you to receive a COMPLIMENTARY portfolio evaluation to help you protect and defend your wealth in today’s recession and beyond. 1 Bloomberg: “U.S. Economy Shrank 6.2% Last Quarter, Most Since ‘82,” 2/27/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
Last Friday’s revision to fourth-quarter GDP growth was dismal in the extreme—no two ways about it.
With the U.S. economy falling off such a steep cliff at the end of last year, it is finally dawning on optimistic investors that this is NO garden variety recession. In fact, the magnitude of this decline appears to be as severe—if not more so—than any recession in post WWII history. 
Nearly 600,000 U.S. workers were laid off in January alone. More jobs were lost last year than any time since WWII, and the February employment report, due on Friday, could show another 700,000 Americans out of work.
