Double Recession for 2008?

I want to bring up a potential scenario that may evolve over the coming months which could end up being a trap for long term investors who feel that current prices in the stock market are "a bargain".

The first quarter of 2008 GDP data is expected to show a continued weakening economy. Technically the GDP must dip negative for two consecutive quarters to be officially recognized by the US Government as being a recession. But taking into account the numerous economic indicators which have already shown that the economy is declining at a rapid pace, we feel that recession is already upon us even if the official US Government declaration is not issued. The Government is so concerned with getting people to spend money that they are putting the nations deficit into the hole even further for the sake of having people go out and buy TV’s, toys for the kids, or any other discretionary item. All in the name of lifting the GDP.

But just what will the $600 dollars received from the stimulus package do for the average American? This is a one time shot, not a pay raise, not a reduction in health care costs, not a reduction in the cost of gas and heating, and certainly not a fix to the credit crisis and housing market. So this one time shot of money in everybody’s pocket will only provide a brief blip on the GDP. And that blip will likely be very weak as we anticipate that a substantial amount of the $160 Billion dollar economic package will be used to pay bills and other necessities, most of which will not reflect in the GDP of the country.

But what the economic stimulus package is really going to accomplish is provide a temporary felling of euphoria, a temporary high if you will. And it is hoped by the Government that this ‘free money high’ will spur people to buy even more as they get a false sense that the economy is returning to normal. The Government does not care about the long term implications of their actions, they only want to boost the GDP at any cost…  even at the cost of pushing the average person further into debt and further reducing the ability of people to save money.

The chart below shows very clearly that the ability of people to save money continues to deteriorate and is now negative. In short this means that people are not able to save money, and what money is saved is being used for everyday expenses to survive. If you truly want an economic indicator that gauges the overall health of an economy it would be this one. A strong, healthy, and vibrant economy would be reflected in the ability of people to spend money AND save money at the same time.

 

 

 

 

 

 

(source: US Department of Commerce)

The less money people are able to save means that more and more people have less cash reserves to use as the cost of living continues to increase, further pushing the consumer into debt. This is a ticking time bomb waiting to explode as a breaking point will be reached at some point when credit availability dries up for those already extended too far and they have no reserves to meet their financial obligations such as paying for food, housing, and other necessities of life. Forget about going to Wal-Mart to buy the latest Batman DVD or to Best Buy to purchase a new flat screen TV to watch it. But in the short term the Government only wants to inject money into the pockets of the average consumer in an attempt to entice him or her into spending more money at the local stores to keep the GDP afloat. The only thing that matters is that money flows into corporate America’s pocket so that corporate earnings increase and is thus reflected in the GDP.

So this $160 Billion dollar stimulus plan impact  will only be temporary as we see it. Then as the cost of living continues to climb the consumers will go right back to cutting back on spending, this time the cut backs in personal spending may even be greater as the stimulus package encouraged people to take on even more debt, leaving them further in the hole then they ever were. 

So the economy, as measured by the GDP may show a brief rise around the middle of the year to only fall back again by the end of the year or early next year and bringing the markets right back down with it. And the chances of the markets declining even further then what we have experienced so far are greatly increased.

A "double dip" in GDP would only confirm that the economy is not strong enough to stand up on its own anymore. And with that the confidence in the economic outlook will be further eroded and the markets will decline. So as long term investors are ‘loading the boat’ thinking that the worst is over could be in for a rude awakening later if this scenario becomes a reality, which is increasing with each passing day.