Define Your Economic Recovery

Posted by on 08/24/09 in America, Behavior, Markets

It’s a good time for each of us to step back and ask how we are defining “economic recovery.” What factors must be in place before we determine intellectually and emotionally that we are through the recent economic downturn and on the other side?

Why is this important? Because since the fall of 2007, most Americans have seen their net worth erode steadily through loss in the value of equity investments, reduced property values and in many cases, lower business valuations and lower income. As a society each quarter has brought reduced absolute wealth. We find it harder to buy, harder to save and harder to plan for the future. This loss of wealth has a cumulative effect amplified by the length of the downturn and by its breadth. Most of us have never had so many hard-working intelligent peers and colleagues unemployed or underemployed. It simply has not been such a significant issue for such a long time in the post-WWII era.

Being human, it is natural to extrapolate from recent events and project them into the future. Yet, that is not how a cyclical economic system works. The system moves through periods of growth, stasis, consolidation, retraction, and then…growth. Unless one believes that the global economy is in perpetual freefall (in which case survivalist courses are in order), it is important to stay rational and dispassionate in one’s assessment of the economy. There will always be bad news that one can use to validate a bearish economic outlook. But that should not be confused with perceiving a recession or economic downturn around every corner.

So make a list for yourself. What are you looking for as you consider the status of the economy?

  • Are you looking for the stock market to be up? How much? From what reference point? Do you want it up from October 2007? March 2009? August 2009?
  • Which stock market(s) are you monitoring? Are you looking globally or just domestically? Why?
  • Are you looking for consumer spending to increase? Back to what it was in a highly leveraged economy? Enough to still leave room for personal savings?
  • What employment trends do you seek? Is it enough to see unemployment stop increasing? Must it decrease? To what level? What if people are working for lower wages than previously?
  • How should the dollar behave? Should it stabilize or even strengthen? Can there be a global economic recovery with a “weak” dollar? What if the dollar has been permanently re-priced? Is that okay?
  • What if America is experiencing slower growth than other parts of the world? What if states or regions or sectors within America remain sluggish? What if America emerges from this downturn with a more humble economy?
  • Are you waiting for the value of your home or other property to return to previous levels? Is it enough that the value has stopped declining? Has it stopped declining? How do you know?

These questions are important because if we do not know what we are looking for, we have no objective basis to evaluate when we are through the worst of the storm. Many investors, homeowners, and business owners have a tendency to think that the highest previous value of their home, investments or other enterprise is its “true value.” Until they see that value again, they remain pessimistic. It is much harder to acknowledge that the previous high value may have been inflated because the overall economy was highly leveraged, lenders, consumers and investors were reckless, and the growth rates were unsustainable. Thus, seeking a return to the previous high in many cases is not a reasonable indicator.

So take a few minutes to decide for yourself what exactly you are looking for in the economy. We can promise that there will be plenty of bad and good news ahead; there always will be. But don’t let that interfere with your ability to thoughtfully evaluate your business and investment opportunities.