Economy 2008 - The "R" Word?
Did you notice Industrial Heating’s monthly economic indicators for January? Similar to the Purchasing Manager’s Index (PMI), these indicators reflect growth in our industry if they are over 50. January’s numbers, which reflect changes from November to December, were below 50 for all four of the measured quantities. Similarly, the PMI for December was also under 50. It did, however, recover to above 50 in January.
Based on several soft December numbers, everyone seemed ready to say that we are in a recession. As of this writing, we are not. Could it happen? Ask 10 different economists and you will get 12 different answers.
What is a recession? By definition, it is six consecutive months (two quarters) of negative economic growth – falling real gross national product. The GDP for the fourth quarter of 2007 will likely be revised a few times after this writing, but early numbers show an increase of 0.6%. This compares to 4.9% in the third quarter. It’s unclear exactly how December’s numbers contributed to the quarter, but if we are in a recession, it likely started in January at the earliest. By definition, we could not claim to be in a recession until six months of negative growth has occurred – July at the earliest.
Reporting on February 1, the Institute of Supply Management (ISM) found that one of the top performing industries in January was “Primary Metals.” Reporting production growth in January are the primary-metals industry, miscellaneous manufacturing and fabricated-metal products. These are good signs for our industry. When discussing the PMI of 50.7%, the ISM said that “the past relationship between the PMI and the overall economy indicates that January’s 50.7 corresponds to a 3% increase in GDP on an annual basis.” If this is true, it’s unlikely a recession started in January.
Admittedly, there are some trouble spots in our economy that could affect us negatively in 2008. The credit shortage causes lenders to be reluctant to lend – as some of you may have experienced – and the unstable dollar may discourage overseas investors from U.S. investments. Both of these could negatively affect us in 2008. Will they? Ask an economist. Speaking of which, Jeff Thredgold – an economist by vocation – reminds us in his humorous collection “On the One Hand …” that “economists predicted 9 of the last five recessions.” 2008 might just make it 10 of the last five.
One economist speaking about the possibility of recession in 2008 said, “Americans could just get scared by a barrage of bad news.” If people do get scared and become overly cautious with their money, spending will go down and the economy will shrink. This is the logic behind the incentives being discussed. Money goes into our hands from the federal government to be put to work in the economy.
It seems that the media is intent on scaring the U.S. consumer, however. They seem to be trying to convince us that we are in a recession when, by definition, a recession could not occur until at least midyear. Even if a recession does occur, Ben Stein reminds us, “Even in a recession, more than 90% of those who want to work will be employed. Even in a recession, most businesses will make a profit. Even in a recession in this era, more than 10 million men and women will need cars and trucks. Many millions will need new homes. In the United States, even in a recession, there are plenty of people with money to spend. There’s money to be made, even when the economy itself has slowed down.”
So regardless of whether you have experienced any slowing in your business in 2008, the key is to not become scared and react in unhealthy ways. Continue to invest for the future because, by most accounts, any downturn in 2008 is likely to be short-lived – perhaps not reaching the six-month recession requirement. Most predictions have GDP “growth” at 0.5-3% in 2008, which happens to agree with January’s PMI number.
If by chance we see a long enough downturn to be defined as a recession, Mr. Stein offers a final reminder, “There’s another key truth about recessions: They always end, and the economy goes on to a new plateau.” Food for thought. IH