You may intrinsically have an idea of when a recession begins (when your neighbors lose their jobs) or when a depression begins (when you lose your job). You might even feel like you know when it has finally ended (when your 401K has returned to the value it was 2 years ago). But did you know that there is an organization that is entrusted with announcing when such periods begin and when they end? Actually they announce when recessions BEGAN and when they ENDED since it is always a backward looking exercise. Located in Cambridge, Massachusetts, the National Bureau of Economic Research (NBER) is widely respected as the authority for such announcements.
If you check out their website (www.nber.org), they list the last four recessions (including this one) dating back to 1981. They show you which month each recession began, which month it ended and how many months it lasted. The recession in which we find ourselves today began in December, 2007 but the NBER doesn’t list an ending month for this recession because they have not yet decided it has ended. At 26 months, it is already 10 months longer than any of the previous three recessions…..and it’s not officially over.
What will determine when it is over? Well, the NBER is not very clear about how they make that determination. In all fairness, economic indicators are not always that clear. According to their website, they examine and compare various measures of broad economic activity including but not limited to employment, real income and real GDP (Gross Domestic Product).
Industrial production is up. No question about it. GDP increased 5.7% in the last quarter of 2009 (this was recently revised upward to 5.9%). It will almost certainly be a healthy increase this quarter. This is consistent with the endpoint of previous recessions. Manufacturing is slowly beginning to increase although at a slower pace relative to previous “post-recession” periods. The ISM (Institute for Supply Management) Index increased in January for the sixth month in a row.
What has probably kept the NBER from announcing “it’s OVER!” is that real income is flat (although it has stopped declining) and unemployment is remaining stubbornly high. An additional 20,000 jobs were lost in January, although the official unemployment rate remained at 9.7%. The Labor Department stated that there are 6.1 unemployed workers for every available job opening, up from 3.4 one year ago. Nevertheless, I think the NBER will eventually look back and proclaim that this most recent recession ended at the end of 2009.
Meanwhile, across the ocean, many economies are not faring much better. There are several European nations which seem to have the problem of spending more than they are producing which means they have to borrow money from other nations (sounds familiar). When a country falls into a recession, being a debtor nation becomes an even more troublesome issue. I made a passing reference last month to five countries that are a cause for concern….Portugal, Ireland, Italy, Greece and Spain. They are also referred to as the PIIGS.
The one getting most of the attention is Greece. Greece all by itself is not a huge problem. It only has a population of 11 million. To put that in perspective, Tokyo has a population in excess of 12 million. Greece likes to spend but apparently is not very efficient about collecting taxes from its citizens. So instead of getting more efficient about increasing its revenues, it has simply turned to the world to borrow….which is kind of like your unemployed cousin telling you he’s having trouble scraping together enough money to take the family on a cruise, could you spot him $10,000?
But Greece’s problems are a little more complicated than your cousin’s. Back in the previous century, all the various European countries each issued their own currencies. There was the French Franc, the German Mark, the Italian Lira, etc. Greece also had its own currency, the drachma. A little over ten years ago, 27 of the European nations banded together to create one currency, the euro. No more francs, marks, liras or drachmas. It’s kind of like if Alabama, New York and California all used one currency. Oh, wait, they do. The Europeans figured that if 50 states could successfully run an economy with one currency, surely 27 nations could manage. Never mind that they all speak different languages but that all 50 of the United States speak English (except a couple of the Southern states).
A few European nations declined the invitation to the one currency party. Britain still uses the Pound. Sweden still uses the Kroner. But most of the European nations adopted the euro.
As long as the world economy is humming along nicely, having one currency works well. Recent economic events, however, are causing a little bit of a strain on the euro and an even bigger strain on Greece. Prior to adopting the euro, the economic malaise in Greece would play out a little differently. If Greece spent more than it earned, it would have to borrow (sounds familiar). If it continued to spend more than it earned and continued to borrow, it might find itself without the ability to repay what it had borrowed. One solution is to crank up the printing presses and print more drachma (sounds familiar). At some point, excessive printing of currency causes the value of the currency to decline relative to other currencies. This is not all bad. If the value of the drachma declined significantly, Greece’s products would become cheaper to foreign consumers like us. A cheaper currency can actually help countries recover from their economic problems.
Suppose, for example, a jar of Greek olives normally cost 1 drachma and I could purchase 1 drachma with $1.00. If the drachma significantly declined in value, it might eventually reach the point where I could purchase 2 drachmas with $1.00 which would allow me to buy two jars of olives. The devalued currency would make all Greek products seem less expensive to consumers from other countries. It would also make products manufactured in other nations more expensive to the Greek consumers. Greece would soon be exporting more products and importing fewer products. When I purchase those two jars of olives, I must first take my dollar and purchase Greek drachmas. If I purchase very many olives, the value of the drachma would eventually increase, possibly rising back to where it was before the economic indiscretions. The resulting increase in exports and demand for the Greek currency would eventually pull Greece out of its economic doldrums.
So what’s the problem? The problem is Greece is not in charge of printing the Euro. Although the Euro has recently declined against most currencies, the healthier economies of countries like France and Germany are keeping it from declining enough to benefit Greece. And you can bet the countries which are managing their economy more prudently are not very happy with THEIR cousin who wants to borrow money to take the family on a cruise (Greece). Meanwhile, not far away, Spain continues to experience 19% unemployment and a budget deficit that is above 11% of GDP. Stay tuned. This could get uglier.
You are probably tired of reading about mortgages and foreclosures in my Investment Commentary every month. So I will only tell you that there were 315,000 new foreclosures in February which completes a string of 12 consecutive months with over 300,000 foreclosures.
The U.S. has issued a couple trillion dollars in new debt with hardly a hint of higher interest rates. Industrial production has ticked up (at least temporarily) with hardly a hint of higher interest rates. Inflation still seems to be a distant consequence. Although we are reluctant to extend security duration, at Boyer & Corporon Wealth Management we are relying less on debt from governments and agencies while adding some yield through corporate bonds and dividend paying equities.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.