Rough Patch

The economy seems to be deteriorating by the hour. New headlines come in daily that not only reinforce how bad things are but suggest that the worst is yet to come. It's like nothing I've ever seen.

To be fair, I've never followed the economic news as closely as I do these days so I don't have many other points of comparison. But I honestly don't think it would matter. If anything it would probably just remind me how much more severe this downturn is than everything since the Great Depression.

Check out this gem from Thursday's Wall Street Journal. The paper surveyed 46 economists about the overall health of the economy, and 3 out of 4 respondents said that we're already in a recession.

Not only is that a bad sign for the future, it's also a somewhat astonishing result considering that technically we're NOT in a recession. A recession has a very specific definition - 2 consecutive quarters of negative GDP growth. We haven't even had one quarter of negative growth yet. Q4 was positive (+.6%) and the majority of economists surveyed Thursday think both Q1 and Q2 will be mildly positive, too (+.2% and .1%, respectively).

In other words, they think we're still six months away from starting our first negative quarter, which means were still a full year away from actually being in a recession.

So why did so many of them say we're already in a recession when they know technically it's not true?

Because we are.

There are many reasons, but the biggest is the decline in consumer spending in the United States. Roughly 70% of US GDP comes from consumer spending - clothing, groceries, consumer electronics, furniture, appliances, etc. And for the past decade most of those purchases have been funded by easy credit: mortgages, home equity loans, and credit cards.

Those days are gone. Simply put, too many Americans are tapped out now - they can't borrow even if they want to. Thus, they can only buy what they can afford from their paychecks. That will significantly drive down retail sales, which will drive down share prices, which will lead to layoffs. And the cycle will continue, as fewer Americans have jobs and spending continues to fall.

The severity of the downturn remains to be seen, but there is not a lot of reason for optimism. $4.00/gallon gas certainly doesn't help.

We're in a rough patch now; here's to hoping we weather it well.