Are We in a Recession?
I find the talking heads from Fox Business and Bloomberg to be quite entertaining. They appear to have vast business and economic backgrounds, yet can’t agree on whether we have entered into recession or are on a path of expanding growth. They both could be right.
Traditionally, a recession is deemed to have occurred if the gross domestic product (GDP) shrinks for three consecutive quarters. This theory may no longer apply to a world economy. China’s GDP has declined to approximately 6.5% growth from double-digit territory. This is suspect as the Chinese Government restricts data defining the economy. In addition, Japan, Russia and the European Union economies have been in the tank for years. These reductions impact the US, and commodity prices (raw metals, oil, consumer goods, etc.) fall as these major world producers demand for these goods drop.
The US is the largest economy in the world. The last eight years have seen the GDP hold below a growth of 2%. If the dollar stays strong versus foreign currencies, exports will continue to be weak. Heavy equipment manufacturers, steel producers, shipping and other forms of commercial transportation continue to falter due to reduced demand. Inflation remains at bay, yet lurking in the woods, waiting to pounce.
The crash of US barrel of oil costs with subsequent reduction in gas prices have put more money into the US consumers pocket. The US consumer make up two-thirds of the GDP. As long as gas prices remain under $2 per gallon, American's will spend this money on vacations, consumer goods and major home renovations. This appears to keep the economy moving even if the overall numbers aren't robust.
Sections of the Nation are already feeling the negative impact of the oil prices. The oil shale producing states and the manufacturing businesses supporting these industries are laying off workers, bleeding cash and, in some cases, filing for bankruptcy protection. Texas, North and South Dakota, Wyoming, Oklahoma, Colorado and Pennsylvania have been hardest hit by the drop in demand. Home prices, employment and affiliated businesses have been hardest hit.
It appears recession depends on where you live and what industries support the local economy. Automobile producing states, consumer service sector businesses, food production and technology companies continue to lead the way. In fact, they can’t even spell recession. Those states that support oil, steel, heavy equipment, mining and exports remain shackled by the world economy.
Let's just hope oil prices stay down, inflation is sleeping and no major world events occur. We are balancing on a rope with no safety net left for the central banks. Both groups of economists are right. We are both in a recession and growing. It all depends on your perspective and location.
Chuck Mouranie is a Certified Turnaround Professional with over 35 years of experience assessing the financial and operational health of companies in a variety of industries. If you are interested in learning more about whether an upcoming economic downturn is going to impact your company, please reach out to Chuck at email@example.com.