Thursday, May 31, 2007

Recess or recession? Are we playing or being played by government numbers?

In April, the Commerce Dept. projected that first quarter GDP - the broadest measure of domestic economic activity - grew by 1.3%. As usual, the government number crunchers were wrong. Not only wrong, but wrong by more than 50% as the latest estimate was announced today at 0.6%. A couple more revisions and we'll officially be in recession. We may be already... probably are... but it doesn't really matter.

Leave it to the federal government to botch statistics in such a monumental manner, though it hardly manners to the average US citizen or investor. At the other end of the economic food chain, however, the big fish may not take the news so readily. Many investment decisions are based on economic data, and, at the very least, news of a recession looming is likely to send some of the weak-kneed types scrambling for the exits, and that's just fine. More profits for the brave.

Dow 13,627.64 -5.44; NASDAQ 2,604.47 +11.88; S&P 500 1,530.62 +0.39; NYSE Composite 9,978.63 +15.02

Based on today's trade, there was some effect from the figures, though it was muted. These macro-economic figures are tough to wrap one's mind around. First, nobody really has a handle on the real, raw data; second, there are rounding errors, adjustments for inflation, the foreign value of the dollar and other considerations in the nebulous world of economics to consider. The margin of error is probably around 1 1/2%, so when we get close to zero, it could be a positive or negative number.

Really, there's no good reason to get agitated over a decline in the GDP unless it's substantial, like 3 1/2% or more. Even then, recessions are natural and necessary cycles in robust Keynesian economies. Recessions are just the normal response to excesses - of which there have been plenty of late - as a way of balancing the books, so to speak.

Also, recessions are barely noticeable on the surface. Life goes on, some businesses do well while others have to tighten their belts a bit, but, unless the recession is long and deep, the economy in question usually emerges stronger for the experience.

We won't know for sure when we're in a recession for at least another 2-3 months, if at all. If the first quarter was actually contracting, so too would the second quarter have to be, as the most widely-accepted definition of a recession is two consecutive quarters of negative growth, or contraction. Fear not, even if we are already there, it's not going to hurt much.

Besides, annual GDP for the US is in the range of $13,000,000,000,000. That's 13 TRILLION Dollars. a 2% decline would be $26 billion. Believe me, nobody, especially you and I, is going to notice.

In any case, advancing issues were ahead of decliners by nearly a 3-2 margin. There were a preponderance of new highs: 568, to a mere 65 new lows.

The price of oil crept up another 52 cents to $64.01. Gold shot up $7.40 to $666.70. Silver was higher by 25 cents to $13.47, though both of the precious metals have been stuck in a narrow range for the past 14 months. That's why numismatists are called "collectors" and not "investors."

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