Fisher Investments Editorial Staff
US Economy

Economic Relativity

By, 07/07/2010

Story Highlights:

  • Calls for a "double dip" recession intensified on the heels of a number of June economic reports displaying slowing growth last week.
  •  We're likely to see alternately faster and slower growth rates in the coming months and years—particularly after periods of accelerating growth.
  •  What matters is the economy continues moving ahead—as it did in June—and so far, in context, there's no reason to think that can't continue.

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Calls for a "double-dip" recession intensified on the heels of a number of June economic reports last week. And truly, some of June's numbers displayed slowing growth—but the key word was growth. Declining rates of output growth are not the same as declining output in an absolute sense, and they certainly don't have to herald a recession—context is paramount. As Einstein might say, "It's all relative."

After the economy hit bottom last year, it moved dramatically higher—growing an aggregate 5.6% in the fourth quarter alone. This is pretty typical for an economy in recovery—growth not only returns, but it actually accelerates and hits especially fast growth rates for a little bit. We've certainly seen that so far in this recovery—in the US and in spots globally.  

 

But those first bursts of energy associated with an economy correcting upwards aren't usually sustainable in the long term. To demonstrate why that is, take a look at what constant and accelerating growth rates look like next to each other. (Of course, this is a simplification for explanation's sake—these would be truly extraordinary growth rates in the real world.)

 

A constant growth rate: 2, 4, 8, 16, 32, 64, 128, 156

An accelerating growth rate: 2, 4, 12, 48, 240, 1440

 

Accelerating growth is pretty tough to keep up, but that's what folks seem to think should be happening right now—in other words, one month's rate of growth should always beat the previous month's rate of growth, and so on. But that rarely happens in the real world. It's only natural that a long period of acceleration and high growth rates (as we've just seen) would be followed by a period of deceleration (which is still growth!) to a more sustainable growth rate.

 

GDP, industrial production, consumer spending—these numbers are usually reported as a percent change over whatever comparative period is favored (a week, a month, a year, etc.). A lower percent change from one period to the next does not mean the statistic is shrinking in an absolute sense—and in context, after a period of acceleration and very high growth, deceleration does not necessarily mean the recovery is grinding to a halt.  

This is an important distinction, because headlines may not be so discerning as to whether they are reporting a declining rate of growth, or a decline in the absolute sense. And as long as worries are the soup du jour, declining growth rates will be spun into tales of economic decay. Throughout a normal, multi-year economic recovery and expansion, there are alternating periods of faster and slower growth, separated by accelerating and decelerating rates. What matters is the economy continues moving ahead—as it did in June—and so far, in context, there's no reason to think that can't continue.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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