Of the last five GDP estimates* released by the Bureau of Economic Analysis, four of them have produced an annualized growth rate below 2.0%**; 0.4%, 1.3%, 1.8%, 3.0%, and 1.9% respectively. Additionally, the Federal Reserve revised down their own ranged-estimate of 2012 GDP from 2.4% – 2.9% to 1.9% – 2.4% last week. Historically, sub-2.0% growth readings in real GDP have resulted in recession.
From Bloomberg Briefs:
[T]he ECRI Weekly Leading Index fell 0.4 percent during the week ended June 15, resulting in a smoothed annualized growth rate of minus 3.5 percent–the steepest contraction since mid-February.
Any and all recessions are preceded by notable downturns in [the Ratio of Coincidental-to-Lagging Index]. During May the ratio fell to 90.5, the third consecutive decline and the lowest reading since March 2010.
The definition of recession is subject to interpretation; the Business Cycle Dating Committee of the NBER itself has leeway in determining official recessions. Furthermore, the committee decides this retroactively, well after recessions have begun. Personally, I view this period, beginning in 2007, as one prolonged recession that has not been seen since the Great Depression. One only needs to look at the continued Employment / Unemployment data for supporting evidence of this thesis. Nevertheless, whether we are in a prolonged recession (officially we are not) or going to experience a recession in the future, this argument is somewhat semantical and not completely relevant to investment strategy. That is, opportunities within capital markets need to also be viewed from a relative perspective which does not necessarily coincide with a downturn in the economy.
The economic data is once again beginning to build a strong case for an official recession. However, there will be opportunities among all asset classes–at different times–during that economic period. Your investment strategy needs to be dynamic enough to both capture the majority of those opportunities and avoid the majority of the intermittent impact of negative sentiment. I expect the summer months to continue their routinely volatile seasonality, but I also see a fair amount of upside potential.
*Starting with the period beginning in 2011Q1. The most recent release (2012Q1) will be further revised on June 28th.
**Based on Chained 2005 Dollars