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Recession Now: It's Deep and It's Going to Last a Long Time, Sonders Says

Posted Oct 22, 2008 02:42pm EDT by Aaron Task in Investing, Recession
Related: SCHW, ^gspc, ^ixic, SPY, TLT, ^DJI, DIA

With the financial market crisis unresolved, the "real" economy has gotten scant attention. Unfortunately, the little discussion that's occurring is typically around a debate over whether the economy is already in recession, or about to go into one.

Fughettaboutit. The U.S. economy is in a recession that began in late 2007 and is likely to last much longer than the typical downturn, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

Contrary to popular belief, "consecutive quarters of negative GDP" is not what defines a recession. In fact, the National Bureau of Economic Research uses five parameters to determine whether the economy is growing or not:

  • Real GDP (inflation-adjusted GDP, that is)
  • Industrial Production
  • Employment
  • Personal Income
  • Wholesale/Retail Sales

Four of five of those indicators rolled over late last year and are now showing the economy in a "deep" recession, Sonders says. The good news is the stock market typically turns up about 60% through an economic downturn; the bad news is that it's unclear whether we've reached that point quite yet, and Sonders is understandably worried about the "deleveraging" of both the financial system and consumer's dependence on debt.

While fairly dour about the current environment or the likelihood of a turnaround in housing anytime soon, Sonders is optimistic the U.S. economy won't suffer a "lost decade" (or more), akin to Japan's post-bubble malaise. Her view is fueled, in part, by confidence that while our policymakers are far from perfect, they've been much more proactive in tackling the current crisis than Japan's were in the 1990s.

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