Told Ya So...

Greetings from the Left Coast. God, I hate it when I'm right about negative stuff like this. The bits were barely dry on the monitor from my last post when Russ Mitchell, on CBS's "The Early Show" yesterday morning, said, "There are signs that investors fear the economy may be headed toward a recession. Investors remain nervous about the subprime mortgage crisis and the credit crunch." Then, on last night's NBC Nightly News, Brian Williams reported that Winnebago is expecting to report its first drop in orders in the last six years, wrapping up with, "Over the last three decades of U.S. history, every time orders for mobile homes have dropped, the economy has suffered a downturn soon after." Wow! Who'd have thought that sales of motor homes would be a better leading economic indicator than the ones the Federal Reserve is tracking? This was just a day after CNBC's Erin Burnett told Brian Williams that, "Consumer spending accounts for more than two-thirds of the U.S. economy's growth. And if consumers really start to pull back, that is what will turn us from the r-word of resilience to the r-word of recession." According to the Business & Media Institute, network broadcasts have run 29 stories in the last month that featured that "r-word."

Let's be very clear about something. There's a precise definition of what constitutes a recession. It's not when the rate of growth slows down, which is what the Fed is actually predicting for 2008. It's not when people feel nervous or worried about the future. When a country's Gross Domestic Product declines in two consecutive calendar quarters, that's a recession. You don't have to guess whether we're in one.

Here's another thought for you to ponder. Our economy runs in cycles of expansion and contraction. It always has, regardless of which political party was in power. If you want to see what they've looked like, take a look at THIS. Over the last sixty years or so, the average peak to peak interval has been about five and a half years. However, the last two cycles have been abnormally long by historical standards - lasting closer to ten years, with the actual contraction periods being relatively short. That suggests that maybe were actually getting a little smarter about managing the economy, and that maybe Ronald Reagan and George W. Bush were actually onto something with this tax cut thing.

One more thing in closing. When I was an electronic technician (many years ago) I learned about this thing called "hysteresis." This is derived from an ancient Greek word that means "lagging behind." Here are a couple of examples from everyday life: the coldest days of winter actually come several weeks after the shortest day of the year, and the hottest days of summer likewise come several weeks after the longest day of the year. That's hysteresis. Next time you're adjusting the thermostat of your furnace, turn it up until the furnace comes on. Then turn it down until the furnace turns off. You'll find that you have to go past the point where it turned on before it will turn off. When you turn it back up, you'll have to go past the point where it turned off before it will turn back on. That's hysteresis.

Well, guess what? Hysteresis affects economic cycles, too. The country was already sliding into recession when Bill Clinton left office and let Bush inherit the problem. If Al Gore had won, we would still have had the recession. Then, on top of the contraction that was already taking place, 9/11 came along and smacked us upside the head. George Bush should have won an economics prize for reacting fast enough to put policies in place - including those tax cuts - that pulled us out of that slump that fast. What should really worry you is this: if the Democrats do take the White House, and do get rid of the tax cuts, and do all of the fiscally irresponsible things that Democrats have historically done, the damage probably won't show up right away. It could take a couple of years. And when it does show up, it will be too late to stop the slide from happening - we could do all the right things, and it will still take time to get things going again. Hysteresis. Remember the word.

Thanks for listening...