Fisher Investments Editorial Staff
Others

The Semantics of Recovery

By, 09/29/2010

Story Highlights:

 

  • Recovery is the period when the broad economy is growing and above its most recent trough but still below its previous peak.
  • The recovery is almost over, the expansion almost here, and any future economic decline (near or far) will be its own distinct recession.
  • Headlines still predict a slow, painful recovery to a vague "normal" level of economic wellbeing—a dangerous assumption for investors.

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Words are powerful but slippery tools, dangerous when ill-defined. It's hugely popular to debate the strength, length, and normalcy of the economic "recovery." But few ask, "What exactly is recovery, and when does recovery become expansion?"

The way we see it, recovery is the period when the broad economy is growing and above its most recent trough but still below its previous peak. We began "recovering" what we lost in Q3 2009, when GDP turned up. Expansion is the next logical step—when we surpass the previous economic peak and are now adding to it. Few admit it, but a little over a year after it began, the recovery is almost over, the expansion almost here, and any future economic decline (near or far) will be its own distinct recession.

 

  • US nominal GDP surpassed its previous peak and all-time high in Q2 2010.  
  • US real GDP is a mere 1.3% below its previous peak and all-time high and will likely match or beat that level in coming quarters.

According to the IMF, a good source of broad global economic data, the recovery is almost over and expansion is on the way for the vast majority of the world too:

 

  • Nominal full-year global GDP is forecast to hit an all-time high in 2010
  • Nominal GDP in 78% of individual countries (including the US) is forecast to hit an all time high in 2010, representing 73% of 2010 global GDP
  • By 2011's end, 91% of individual countries will have hit new nominal GDP highs, representing 91% of 2011 global GDP
  • 67% of individual countries (including the US) are forecast to hit new full-year real GDP highs in 2010
  • 74% of individual countries will have achieved new full-year real GDP highs by 2011's end

Good news right? Not so fast. Enter the weird world of rhetoric and opinion, and things get shiftier. It's not uncommon to stumble on a headline proclaiming "Recovery Will Take Years." That sounds like awfully bad news. But what kind of "recovery" are they referring to? It must be something other than broad economic growth.

The "slow, painful" recovery scenario usually focuses on one or two meaningful statistics and vaguely describes recovery as a return to "normal." That could mean the economy's "normal" rate of growth. Or maybe it means "normal" employment. Or maybe, even more vaguely, it's a "new normal" which assumes of course we've nailed down the "old normal." These are fine points to debate—but they should be fully disclaimed as subjective and very specific economic goals.

Investors should remember that what's normal is an economy regularly shifts gears in both recovery and expansion. What's normal is broad economic recovery, productivity, and profits driving stocks higher. And what's normal is that these primary drivers and stock market gains often run counter to heavily emphasized but lone statistics like unemployment. Sadly, misinterpreting the semantics of recovery is a normal investing error—but one easily avoided by reading between the lines.

*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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