Contrarian Finance

This was just posted on Bloomberg. It's first release of GDP data for Q1 2008 shows the economy growing at an annual pace of 0.6%. Since we need two quarters of negative growth, we're not in a recession... yet.

I say "first release" because they'll revise the numbers over time as they get more data, so there is of course the possibility the could revise it to a negative (and thus recessionary) number later in the year.

It will be interested to see how the Street responds to this news, as it beats the consensus estimate of 0.5% growth, and points strongly to the "soft landing" or "slowed growth" scenario many are so desperately hoping for. Not that things are peachy for the good ol' American Consumer, who certainly is feeling the pinch of increasing unemployment, inflation, and (need I even mention?) gas prices.

To digress for a moment... I think people tend to miss the real impact of fuel prices though. The median income for Americans is something like $43,000 a year. And the average person drives about 12,000 miles a year, and the "Fleet Average MPG" is about 20. So Joe American is buying roughly 600 gallons of gasoline a year. Even at $5/gallon that's less than 7% of his gross income. Granted, going from 3.5% to 7% of your income is a real pinch.

But that's nothing compared to the pinch they'll feel at the grocery store. I couldn't find exact data on grocery budgets, but it seems like the average person is spending anywhere from $300-$600 a month. Even at $300 a month that $3600 a year trumps $5 gasoline as a total budget item. This article from the Boston Globe nicely summarizes my point. They also say that "Food accounts for about 13 percent of household spending compared with about 4 percent for gas."

Milk is up 26%, for example. I think what it boils down to though, is that everyone knows the price of gas, but how many people can quote you the price of a gallon of milk from memory?

Anyway, back on topic. I expect the stimulus package may actually have some positive effect in Q2, so I honestly don't expect a recession until Q3-Q4. My guess is, the Street will settle on the "soft landing" scenario, and feel good about it when the Q2 numbers come out. Then at some point, with unemployment still rising and the mortgage industry only being halfway through 3 years of subprime ARM resets, it will dawn on them that the recession is coming, only not as quickly as they had thought.

I think this year will be tricky market wise, but I expect 2009 to be much, much worse. Sure, there'll be some optimism surrounding a new administration, but in the face of the economic numbers (that I expect) the shine will come off pretty quickly. Then again, maybe it's just my own innate pessimism fueled by a lack of caffeine. Let's hope so.