What a recession actually means

[Aceyducey]

Hi,

I just wanted to ensure that people posting in this forum understand what a recession means in economic terms and in the way it is used when bandied about by economists.

That is, before the emotive words are added by the journalists.


A recession is defined as two consecutive quarters of negative economic growth.

That's all. A small adjustment. Nothing big, bad, unfriendly or scary.

For instance, if in a year you had economic performance such as:

Q1: 0.5%
Q2: -0.8%
Q3: -0.5%
Q4: 2%

That'd be a recession.

However over the year the economy has grown by roughly 1% (using a base of 100 to start).

Whereas if you had economic performance of:

Q1: -0.8%
Q2: 0.5%
Q3: -0.5%
Q4: 2%

That would NOT be a recession as there have not been two consecutive quarters of negative economic growth. However the economy has performed identically over the same period of time (grown by roughly 1% over the year).

Or if you had:

Q1: 0.2%
Q2: 0.5%
Q3: 0.2%
Q4: 0.3%

The economy performed as well over the year as it did during the year of recession, however never stopped growing. Try the calculation yourself using 100 as the base and then multiplying it by the results each quarter.


More dangerous is a depression - for which, in economics, there is no formal definition.

Essentially a depression is a sustained recession over a long period of time - years or decades.

To quote Labourlawtalk....(my bold)

In economics, a depression is a term commonly used for a sustained downturn in the economy. It is more severe than a recession (which is seen as a normal downturn in the business cycle). Like a recession, the start of a depression is characterized by increases in unemployment, restriction of credit, reduced output and investment, price deflation, numerous bankruptcies, and reduced amounts of trade and commerce. Unlike a recession, there is no official definition for a depression, even though some have been proposed. Generally it is marked by a substantial and sustained disequilibrium between the quantity of goods that could be produced (potential output) and the ability to purchase them. One could say that while a recession refers to the economy "falling down," a depression is a matter of "not being able to get up."

The most noted depression is the Great Depression that affected much of the world in the 1930s. Also notable is the Long Depression that lasted from the 1870s until the 1890s.

Today many economists believe that the combination of the social safety net and a much better understanding of macroeconomics makes another depression highly unlikely.

http://dictionary.laborlawtalk.com/Economic_depression

Remember: Knowledge = power

(Acey thinks: So does that mean that absolute knowledge = absolute power = absolute corruption? )

Cheers,

Aceyducey

 

[RichardC]

Being a grey headed gentleman, I have lived through a number of recessions but none have effected me personally to the extent that I remember "That %^&#* year!" so Acey is correct when he says "That's all. A small adjustment. Nothing big, bad, unfriendly or scary."

During those years I was a wage earner/small businessman with spouse in steady employment, living within my means and paying a modest mortgage. Anyone living on the edge with finances stretched to the limit per -ve geared investments and living the good life may not find them to be such non-events though.

Depressions are much more scarry. I was born less than ten years after the Great Depression finished and I grew up when it still loomed large in peoples minds and our literature.

I tried Googling Frank Hardy's Horses Don't Bet On People but bombed out so I assume my memory was faulty and I was really looking for The Four Legged Lottery. An interesting book about life in Melbourne during the early 30's but probably unavailable in even the best of 2nd hand bookshops. Power Without Glory should be though and would be worth reading to see just how different things were 60yrs ago. Hardy was left of centre but the wars and the depression dissillusioned many decent men.

Thommo

 

[pricey]

Hi Acey,

Firstly I love reading your posts, you are fantastic.

I am always now paranoid to a certain extent over recession, which is why it is good to read your article.

I turned 18 and finished high school at the end of 1990 and my entry into the workforce was 1991, in the recession. My father lost ever single thing as he went through a divorce, and then struggled to pay the 18% interest rates, on his factory and business.

As a result I was always talked out of buying realestate by my dad becuase of the "when recession comes" comments and "growing up in the depression".

I now have five investment properties, running at about 40% equity. However...I guess i'm still paranoid after seeing my dad go through the crisis he went through from the recession. I do however realise our case was probably far worse than the average family.

Can you and other "grey haired men!" who lived through these times tell us more about what happens to realestate in the recession, when do interest rates start to fall (ie during the recession, after the recession), what type of real estate gets hurt the most ie industrial, commercial, residential, where it gets hurt worst ie inner city, outter suburbs, what happens to waterfronts. Do rents increase or decrease during these times. Also, do you think major rent increases are coming or just small annual increases? Do you think Queensland, sydney or melbourne will be hurt equilly or will it be different for each state?

Finally, when do you think we will have one? And what advice could you give us?. Micheal Yardney believes the worste is now over. I do tend to agree with him, however, I guess interest rates will now play a big part in what is going to happen. What do you guys think rates will go to? Also, do you believe that rates are now as high as say 1989 as far as mortgage payments to income go? How long do the recessions usually last and how long until its business as normal?

Regards,

Pricey

 

[Beach Bum]

You don't have have grey hair to remember a recession.

A recession is the opposite of a Boom.
In a boom, most have money to invest and support lifestyle.
In a recession, most are borrowed to their limits, few can afford to buy more, demand collapses, investment prices fall, living expenses rise.
As more people run out of credit or spending power, demand slows, the recession prolongs and turns into a depression.

M.Y. states that we had a recession but "we did'nt know it".
This really surprises me coming from someone who touts 30yrs in RE, for all those investors that I know (hundreds) that went through the recessions of the 90's, 80's and 70's and before (my dad was born in 1926 btw) will never forget them.
There is still too much liquidity imho for a prolonged recession, but that liquidity does'nt seem headed for the RE market, instead I would say it's going to the share market for the next 3-4 years.
If that liquidity ends, we may be in for a stock market crash, followed by a *real* recession for a few more years.
By then interest rates may be 12-13%, metro RE rental yields 9%, inflation 6%, un-employement 9%, petrol $2 ltr, bread & milk $5.
We will reminisce about the "good ol days" when we could borrow @ 6%, houses were affordable, petrol was $1 ltr, and credit was easy.
By that time the baby boomers will mostly be inactive (or in hell for their 60's sexual revolution) the economy will have slowed down, inflation & interest even higher, and 12% seemed a good rate.
Then ...when night seems darkest, morning begins...again.

Now back to enjoying the good life while I still can.

 

[lowb]

talking about experiences...
there was a time in the 1990's (i may be wrong) when negative gearing was scrapped and you couldnt apply it. at that time, rents rose dramatically. did any SS people go through that -how was that like?

 

[alexlee]

By then interest rates may be 12-13%, metro RE rental yields 9%, inflation 6%, un-employement 9%, petrol $2 ltr, bread & milk $5.
We will reminisce about the "good ol days" when we could borrow @ 6%, houses were affordable, petrol was $1 ltr, and credit was easy.
By that time the baby boomers will mostly be inactive (or in hell for their 60's sexual revolution) the economy will have slowed down, inflation & interest even higher, and 12% seemed a good rate.

The longer term fixed rates offered by the banks (priced by the yield curve) doesn't suggest that interest rates are going to rise sharply in the medium term. Why should they? The RBA is much more proactive with interest rates, so they'll raise rates at the hint of inflation, decreasing the chance of rates going crazy. Greenspan's massive liquidity injection in 2001, yanking the US back from recession, will surely impact on the RBA's response to an Australian slowdown (no one wants to prolong a recession, and now that we have Greenspan's example, the RBA is more likely to drop rates to bring us out of recession).

The economy will be dead way before interest rates hit even 10% (equivalent to 20%+ based on relative levels of debt). The RBA doesn't just raise rates for fun: it does so in response to economic conditions. RBA independence (as opposed to the Keating years) means that the RBA is free to operate without political meddling.

The only way we would have high petrol, high inflation, high unemployment AND high interest rates is if oil stays high despite world-wide economic slowdown. Is that possible? Sure. Say Iran or the US start another war, or there's a revolution in Saudi Arabia. Another scenario is that economic slowdown causes oil demand to fall at at the same time there's a recession in the US and China. Oil-driven inflation falls, but Australia goes into recession. The RBA drops interest rates to stimulate demand, and just as everyone says the market will never go up again the market turns.

For investors, the key now is to make sure you can hold through a recession. Fixed rates are attractive (especially if you believe interest rates will hit double digits). Then as the recession hits, start buying, within your financial limits. Then hold on because the market will boom again.
Alex

 

[Andrew_A]

Ronald Reagan

I like the wisdom in Ronald Raygun's quote.

A recession is when your neighbour loses his job, a depression is when you lose yours.

 

[Brinkdude]

Recession & Economists

"Give me a one-armed economist!" demanded President Harry S. Truman.

President Truman was the first president to appoint a council of economic advisers. Unlike some later presidents, he actually liked to listen to his policy advisers. However, he preferred a clear recommendation.

He quickly grew tired of economist who gave a good recommendation, and then began, "On the other hand. . ."


"Acey thinks: So does that mean that absolute knowledge = absolute power = absolute corruption? "

The Quote:

"Power corrupts, and absolute power corrupts absolutely."
Lord Acton

Ergo:- Acey's formula is correct.

Context (Boring bit):

In 1870 came the great crisis in the Roman Catholic world over the promulgation by Pope Pius IX of the dogma of papal infallibility. Lord Acton, who was in complete sympathy on this subject with Döllinger, went to Rome in order to throw all his influence against it, but the step he so much dreaded was not to be averted. The Old Catholic separation followed, but Acton did not personally join the seceders, and the authorities prudently refrained from forcing the hands of so competent and influential an English layman. It was in this context that Acton made his most famous pronouncement: "Power tends to corrupt, and absolute power corrupts absolutely."

 

[RichardC]

I like the wisdom in Ronald Raygun's quote.

A recession is when your neighbour loses his job, a depression is when you lose yours.

And a recovery is when the Prime Minister loses his job.

 

[Aceyducey]

A recession is the opposite of a Boom.
In a boom, most have money to invest and support lifestyle.
In a recession, most are borrowed to their limits, few can afford to buy more, demand collapses, investment prices fall, living expenses rise.
As more people run out of credit or spending power, demand slows, the recession prolongs and turns into a depression.

*sigh*

No Beachbum.

A recession is two consecutive quarters of negative economic growth.

It can occur without any of the factors you described above and can have a very small effect on the economy.

A recession is NOT the opposite of a boom.

For that matter neither is a depression.

A Bust is the opposite of a boom.

Booms can occur in certain sectors without occurring across an entire economy.

For instance, the resources boom, the tech boom, the property boom.

They certain impact and may distort an entire economy, but they do not necessarily involve the entire economy.

Similarly a bust can occur in a specific economic segment without occurring across an entire economy.

For example, the tech bust and (as we have technically experienced) the property bust in certain states.

In both cases economies continued to perform strongly and grow. However a particular segment of the economy did poorly.

These booms and busts are occurring all the time in different segments of the economy.

They can contribute to general economic upturns and downturns and even, in certain situations, cause them to occur.

But they are NOT them. They are potentially (not not always) a trigger, but are never the bullet.

Note that when a downturn bullet hits (ie: a recession) it's quite possible for busts in specific segments to follow. But don't confuse cause and effect!

Cheers,

Aceyducey

 

[lowb]

acy is a great teacher!

 

[iookpa]

Acey, what is your outlook for the economy and share/property markets over the next 2/5/10 years, and what strategies are you employing considering that outlook?

 

[see_change]

M.Y. states that we had a recession but "we did'nt know it".
This really surprises me coming from someone who touts 30yrs in RE, for all those investors that I know (hundreds) that went through the recessions of the 90's, 80's and 70's and before (my dad was born in 1926 btw) will never forget them.

During the last recession M.Y. had a well paid job underwritten by the government

One of my best friends was involved in developments in Melb leading into the last recession and nearly went bankrupt because of a development in an area that ( I assume ) M.Y. would classify as a good place to invest in Melboure ( Brighton ). Luckily his business did well enough to get him through, though he lost a lot of money.

See Change

 

[see_change]

acy is a great teacher!

yeah , but what about Acey

See Change

 

[Aceyducey]

Acey, what is your outlook for the economy and share/property markets over the next 2/5/10 years, and what strategies are you employing considering that outlook?

That's a BIG ask iookpa!

At the moment I've trimmed the property portfolio and are focused on holding until it's time to reinvest in the market. I'm deep in resource stocks while particularly avoiding telcos, new media, travel and retail sectors.

My primary focus is on resource company start-ups (business area, not share investing).

I'm looking towards opportunities in retiree and information product areas to be worked up over the next few years.

After we get over the next hump I'll probably refocus on property, finance and retail sectors, however for five years and further out I don't form fixed investment plans.

All I attempt to pick is the current and next boom. Further out is, IMHO, gambling.

And my ultimate goal is to have fun in what I'm doing.

Cheers,

Aceyducey

 

[lowb]

with respect to 10 years

1. the population of australia is ageing

2. australians will need more retirement homes

3. are retirements homes worth investing in? are they similar to serviced apartments?

 

[alexlee]

with respect to 10 years

1. the population of australia is ageing

2. australians will need more retirement homes

3. are retirements homes worth investing in? are they similar to serviced apartments?

Most retirement home projects I've seen are where the tenant moves in, the owner gets a share of their aged pension, and as the aged pension increases you get more rent. Good in that the tenant is unlikely to move out. Sort of like serviced apartments in that your income really depends on the costs of running the facility (and therefore depends on the management company).

Two main issues I had with investing in aged care: 1) financing. When I looked at it banks would only go for 70% financing, and 2) capital gains will be poor as people look at this as an income property.
Alex

 

[iookpa]

"All I attempt to pick is the current and next boom. Further out is, IMHO, gambling.

And my ultimate goal is to have fun in what I'm doing."

Seems like a good strategy to me...

What to you believe the current and next booms will be?

 

[Adlante]

Thanks for starting this thread Acey, very informative!

 

[Adlante]

The longer term fixed rates offered by the banks (priced by the yield curve) doesn't suggest that interest rates are going to rise sharply in the medium term.

Hi Alexee, im just curious as to the above quote. Is this a way buyers can determine what interest rates might possibly do in the future, as im sure the banks would never loose out on money by not putting fixed rates to their dissadvantage would they...???
How accurate is this strategy of determining what interest rates might do?
Cheers