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Recession talk obscures opportunity

Are you tired yet of the endless talk about a recession in the U.S. economy? We have speculated for months about whether we will get into one, and then we’ve discussed whether we are there yet and how long it might last.

As far as I am concerned, a discussion of recession has become essentially irrelevant to an understanding of the economy or one’s own financial health.

Let’s look at what this recessionary talk is about. The media uses this important-sounding economic term as an ideal concept to fill air time since it also has negative implications.

To me, the term recession really reflects a mindset that is both negative and unproductive. Virtually all of those who are afraid of a coming recession are unlikely to make business or investment decisions that involve any perceived risk. Therefore, the downside of patiently waiting for a recession to come and to pass is that one misses the opportunities in the meantime.

The other problem with recessions is that even if we had one, no one would know it until after we were through it. Currently, we are not in a recession inasmuch as we haven’t had even one quarter of negative growth. Since there isn’t anything predictive about it, using recessions to influence one’s financial decisions is about as productive as betting on yesterday’s horse race.

Fortunately, there’s a more rational way of dealing with economic uncertainties. I have found that important financial decisions should always be made with a view toward the future. In order to gain any advantage over millions of other market participants, we are primarily trying to predict the direction of the economy, not its turning points or absolute rates of growth. Therefore, we use the idea of business cycles to achieve our goal.

It should be quite obvious that it makes a huge difference in one’s assumptions whether the economy is going into a slow growth mode, as it has now been for six months, or in a high growth mode, as it was from 2003 through most of 2006. If you think about it, we saw the future economic direction in 2006 with the rather sudden slowdown in the residential real estate industry. It seems obvious that when one of the largest industries in the country slowed down, it would have a noticeable effect on our economy at some future time.

Although we use leading economic indicators to help us deal with the uncertainty of the future, in this case it was especially difficult to make meaningful assumptions. One of the most important indicators – the unemployment rate – didn’t work the way it was supposed to since, in this never-before-seen situation, the majority of workers in this industry who lost their jobs – about 2.2 million – were undocumented immigrants. Since they don’t collect unemployment benefits, they were not counted in the statistics. In addition, the decline in this group’s purchasing power didn’t affect our economy much since they sent much of their earnings to Mexico.

The financial crisis in mortgage securities in mid-2007 guaranteed that our economy would enter a slow-growth period.

Just because we may have a cautious view of the U.S. economy for the time being doesn’t mean that we shouldn’t be looking for opportunities elsewhere. If one would rather look for opportunities at home, I would suggest thinking about a change in the direction of our single-family residential housing market after two years of significant declines.

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Dieter Thurow is the principal of Thurow Asset Management Inc., a private wealth management and real estate consulting firm for affluent professionals and business owners in the North Bay. He is located in Healdsburg and welcomes your comments at dieter@dthurow.com.