Last month we raised the question of who is “responsible” for recessions and looked at the role of Consumer Spending plays. Given the significant airtime dedicated to this topic, it would seem at least logical that it must play a reasonable part.
Last month we showed however that consumers have tended to always add to growth and therefore could not be responsible for causing or even contributing to recessions. Therefore the good news is…
Recessions – it’s not your fault!
Before we look at the other participants in this play, first let’s look at the economic cycle itself.
Here we have the “economic cycle” which shows the average cycle is around 34 quarters or 8 ½ years. At the end of each cycle there’s a fairly noticeable slump, which we now know is not caused by a reduction in consumer spending.
Government and Business Spending
As promised, this month we look at the other sectors in an effort to find the true culprit. Given the willingness of governments to claim credit for “running the economy” especially when things are going well, let’s look at government impact first.
The next graph looks at Expenditure in the Economy to September 2009
Spending is essentially either Consumption (71.5%) or Capital Expenditure (28.5%) and last month we saw that consumption was not responsible, so that leaves only capital expenditure (Cap Ex).
Note (above) that government Cap Ex and housing are around 5% each, whilst Business accounts for 18% of total expenditure, or 63% of all Cap Ex.
So now let’s look at Cap Ex and see if that provides any clues.
That looks more like it! Not only do we see a clear driver here, but clearly if Cap Ex falls by more than 8% this is generally more than the other contributors can make up for and bingo, we have a recession! Given housing and governments expenditure don’t tend to drastically change from year to year and business accounts for nearly twice these combined, it seems we have found the culprit.
Businesses Cause Recessions!
Now that’s the numbers, but torture a statistic long enough and you can make it say anything, so next month we’ll apply some logical assessment and see if this actually makes sense in the real world.
 Bill Clinton used this idea to great effect, unseating the previously 90% approved George Bush Snr with the “It’s the economy stupid” slogan, effectively blaming him for the 1991 recession
CEO, Financial Adviser
Analysing what can seem to be like complex issues, Matt is effective in using analogies to better explain scenarios and truths to the rest of us. This is what Matt enjoys – educating clients on the truths and debunking the commonly held (wrong) view.