Monday, September 28, 2009

Time Capsule Post: Open in One Year

Fast forward one year from now, to late summer/early fall 2010. According to most accounts, at that point we should be about one year removed from the trough of economic activity, otherwise known as the end of the recession. So let's say, for the sake of argument, that the recession ended in June, at the end of the second quarter (also, not coincidentally, the latest quarter for which we have some GDP numbers).

What should GDP look like in the first four quarters after a trough? What has it looked like in the past?

Average GDP in the first year of recovery -- going back nine recessions -- is, believe it or not, 7.11%. Raise your hand if you think we'll hit that bogey this time around. After the 2001 recession, however, GDP over the next four quarters averaged only 2.63%, and I fear we won't even do that much this time around.

Interestingly -- and this is the point of the post -- one category has led out of recession seven of nine times, and that is PCE. In the two first-years that PCE did not lead us out -- 1950 and 1980/81 -- Inventories did.

Here is what the average first year looks like:

So, the consumer has led us out of recession by averaging a 3.4% annualized contribution to GDP in seven out of nine (78%) recessions. Inventories, at two out of nine, place a distant second, and nothing else even comes close.

As David Rosenberberg recently put it:

Sustained recoveries hinge on the consumer. While the inventory cycle is key, the word cycle means more than a one-quarter bounceback in auto assemblies from depressed levels -- by definition a cycle implies a trend. So while Inventories play a supporting role after a recession ends, it is only perpetuated if the consumer revives. On average, consumer spending is responsible for over three percentage points of the bulk of growth in the first year of recovery. Housing is also a key contributor. But the consumer has already shown us that it is heading into a secular period of frugality and savings, while housing, notwithstanding signs of an upturn that are really little more than noise on a fundamental downtrend, is in a secular decline. Usually, government plays a small role, but this time around, it may be the only actor in the play, and what multiple does that deserve is a very good question, especially now that Uncle Sam's generosity is supporting a record of nearly 20% of personal income.