Even serious business media have been spooked into believing a recession is inevitable.
CNBC “Squawk Box” contributor David Faber warned investors on the January 7 “Squawk on the Street” that stocks reliant on business spending could hurt since a recession, he said, is imminent.
“Business spending, concerns about business spending overall. I think Anne Mulcahy [CEO] at Xerox (NYSE:XRX [1]) may have said something about business spending,” Faber said. “I’m hearing business spending slowing. That’s the concern – what happens to the stock market in a recession because we’re heading into one it looks like.”
But not everyone thinks we’re on a collision course with a recession, and basing decisions about your financial portfolio based on that assumption could be a mistake.
“We remain confident that neither a recession, nor any significant consumer slowdown, is in the cards,” Brian Wesbury and Robert Stein, economists for First Trust Advisors, L.P., wrote on January 7 [2]. “The Fed is not tight, tax rates are still low, productivity is still strong, wages, incomes, and profit margins are still robust, and, after revisions, the US economy has proven its resilience time and time again.”
In fact, it’s when the recession bells are sounded that businesses are in the best position to grow, which is an opportunity for a company like Xerox to expand.
“Consensus recession forecasts don’t become the consensus overnight,” Wesbury and Stein wrote on Dec. 3, 2007 [3]. “They usually percolate over several months or even quarters. Businesses, in preparation for the assumed recession, keep inventories lean and refrain from new large investment projects. As a result, unless monetary policy unexpectedly becomes too tight, knocking the legs out from under demand, there are no negative surprises and businesses are in a position to expand.”
The definition of a recession still remains [4] a period of general economic decline; specifically, a decline in GDP [gross domestic product] for two or more consecutive quarters.
For the last two quarters, GDP (as reported by the U.S. Commerce Department) has grown at a rate of 3.8 percent in the second quarter of 2007 and 4.9 percent in the third quarter - not a sign of a recessionary trend.
Although fourth-quarter GDP numbers for 2007 won't be released until March, not everyone thinks they will be negative. Economist and "Kudlow & Company" host Larry Kudlow told viewers of CNBC's January 4 "The Call" [5] that GDP will come in at least at 2 percent.
“Our economy can grow at three-and-a-half percent,” Kudlow said. “That is its potential. Right now, in the fourth quarter, it's going to grow one percentage point less.”