- US GDP grew at a 1.9% annualized rate during 2008's second quarter—less than economists expected.
- A revised fourth quarter 2007 GDP reading showed the US economy actually declined 0.2% during the final three months of the year.
- Both figures provided fodder for those who seemingly long for a recession.
- The US economy is stronger than many believe—good news for long-term investors.
GDP news hit the presses—and came in at a respectable 1.9%, far from the recession folks have nearly universally been expecting for over a year. So where's the celebration? It turns out, according to yet another revision, the economy shrank a mild 0.2% at the end of 2007. To boot, Q2 08's GDP reading is being touted as "below expectations."
Economy Gains Less Than Expected
By Chris Isidore, CNNMoney
Bear in mind this is the initial GDP figure—it can and will be revised up, down, or sideways another few times (and can even be revised years later.) Still—below expectations? Expectations in general were for recession. Granted, as Q2 was ending, some "experts" began making more realistic forecasts, perhaps in an effort to not get caught with egg on face because in mid-June their consensus was for 0.5%.
But what about the downward revision to 2007's fourth quarter GDP? That cements a recession, doesn't it? To many, it does.
US Recession May Have Begun in Last Quarter of 2007
By Timothy R. Homan, Bloomberg
But a downward revision to a quarter that ended eight months ago doesn't mean the US is headed for recession now. We'd caution disdaining doomsayers not to feel too vindicated over last year's downward revision for a single quarter. Look at it this way: It just means the economy has been speeding since and is stronger than many think.
Recession is always a risk, of course, and only time will tell if one is now underway. But maybe we're simply witnessing a new movement—"Recessionism." It could be defined as a system based on the belief we're in a recession because everyone says so. But if you're a long-term investor, don't adjust a prudent strategy due to fear of what might happen. Anything might happen. You might win the lottery. You might get mauled by a mountain lion tomorrow. But neither is very likely—you should base investing decisions on the likeliest scenario based on rational analysis.
Keep in mind, no one has ever proven very good at forecasting recessions—economists or otherwise. In fact, there's a running joke in the industry: "Economists have predicted 11 of the past 3 recessions." We remain confident the economy is better off than feared. And perhaps even the 1.9% reading is too meager.
Q2 GDP Stronger Than Headline Suggests
So how do long-term investors sort through the GDP muck? Realize GDP growth—up or down—isn't a market predictor. Markets historically have risen on below-average and even negative growth. Instead, the market tends to lead the economy. By the time we get to figuring out we've been in recession, the market's done its thing and it's too late. Instead, today's GDP readings are confirmation that sentiment is far detached from reality. On balance, we see results consistently beating gloomy expectations.
Don't fall prey to Recessionism. Try realism instead—like the economy, it's not as bad as you might think.
For more of our thoughts about GDP as an indicator, see past cover stories below:
Yes, But… – 05/29/2008
Phantom Storms – 05/01/2008
Still Growing – 01/30/2008
Stocks Don't Look Back to the Future – 10/27/2006