Is it over?

Last night I was meeting with clients, and once again I was asked the big question.

Is the recession over yet?

This is one of those questions where the answer depends on where you are standing.

In the world of economics there are leading indicators, lagging indicators, and current statistics and reality. They may all be very different things. We see patterns in the data, and some people try to make predictions based on past experience. Forecasting can be a deadly game, and you are sure to get shot down by someone who is blessed by 20/20 hindsight. Also all forecasts are subject to bias. Are you a cup half full, or a cup half empty type of person?

What I will say at the moment, is that given the current situation, it looks like we might be on the road to a gradual recovery. The Bank of Canada has declared the recession over in Canada, the EU is optimistic, and the US believes that they are beginning to turn around.

But my client’s unspoken question was “when will I see a recovery”. Firstly, remember that during past recoveries, we have progressed in “two steps forward, one step back” fashion. There will be ups and downs as we wander in a generally forward direction.

So we have to ignore the day to day hysteria of the business channels who spend the day trumpeting some piece of useless news as the stock market rises, only to beat their chests and tear their hair out the next day as the market falls 50 points, and they cry crocidile tears over today’s dire statistics which are an obvious indication that the experts were wrong, and the sky is indeed falling. Hog wash. They need to garner ratings. They need the next breathless piece of news to justify the fact that they are taking up valuable airwaves 24 hours a day.

When the markets began to fall last year, I began to talk about the pattern we normally see in these situations. Usually, you can expect the market to fall to a certain (unfortunately unknowable) point. Then we would expect to see a period of time where the market kind of bounces along the bottom. When things begin to look better, the markets will begin to turn upwards in a two steps forward, one step back dance, as we see a gradual return to normalcy.

TSX Oct 27,2009

So far, so good. But the stock markets are not the real world.

Stock markets are generally a device for forcasting the future profits and profitablity of a company. So a stock price is the assumed future value of the income which a company is expect to produce. The markets will usually be 6 to 9 months ahead of the real economy.

Since the markets began to turn around in April, if history repeats itself, this would indicate that somewhere in the next few months we should begin to see the real economy begin to improve. Business should pick up, inventories will need to be replaced, total sales should improve.

Now employment is a different thing. Employment is a lagging indicator. Companies will wait until their business has picked up, and the order books are full before they begin to hire people back. Many companies delay hiring until they are spending too much on overtime, and hiring new staff or recalling old staff from layoff is more economical. Normally this will be 6 to 9 months after the general economy begins to improve.

So for the average person, the recovery will become a reality when everyone is back at work, and everyday life is back to normal. That is going to take a little while yet.

Barring any horrible setbacks, right now we can say that we are headed in the right direction, and so far things are proceeding according to historical norms. Fingers crossed.

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Filed under Economy, Employment, Investing, Recession, Recovery, Stock Market

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