Where we stand – Double Dip or Rebound (what causes recessions part 1 – not consumers)

The media and economic commentators currently seem obsessed with this issue so I thought we’d look at where we think we stand and whether it really matters anyway.  The short answer is we are confident the next few years will prove to be a good time for growth investors around the world.  In fact we’d are more concerned domestically.  Whilst there are many issues yet to face, many arguably unprecedented there is more than enough to indicate there will be opportunity in the years ahead.

Over the next few months we’ll explore our reasons for these views and shine a light on some of the “less relevant” issues which seem to continually grab the headlines.

Beware the “all important” consumer 

Given the constant attention paid by many economic commentators, most people tend to believe that the “consumer” is the most important part of the economic puzzle.  Given consumer spending tends to account for 50-70%[1] of the economic growth[2] of most developed countries, this seems to make some sense at least on the surface.

Given this importance there are a range of “measures’ dedicated to this very issue with the most notable the “consumer sentiment” survey.  Whilst there are a range of approaches to such surveys[3], these essentially boil down to asking a range of people “how they feel” at a particular point in time.  Anyone who has posed this question to an adolescent boy or girl, small child or even life partner (male or female!) will appreciate the response may vary somewhat from the truly scientifically measureable[4].  Statistically robust perhaps, but not something you want to bet the farm on!

The graph below shows consumer sentiment over the years

Whilst there is no doubt some correlation between consumers feeling bad and recessions, this is a little short of an accurate yardstick, and possible a reactive measure at best.

Perhaps the more accurate measure then is how they act, after all don’t actions speak louder than words?  After saying you feel bad may well be followed by some old fashioned “retail therapy”.  The chart below shows actual consumer spending.

So if consumers never contribute to recessions, what does cause them and can they be predicted?

Next month we’ll look at how government and business spending impacts economic growth and see if there is a better answer there.

 

[1] 55.9% in Australia according to ABS & IBISWorld as at Sept 2009

[2] At least in terms of the mathematical measurement of GDP

[3] I’m sure the vast majority are well conducted within established statistical protocols

[4] “relationships are hard work because when it comes to their feelings, a man doesn’t know a woman won’t say” Anon