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October 27, 2009

White House Says Recession Over, Will This Become Obama's 'Mission Accomplished?'

OBAMA'S 'MISSION ACCOMPLISHED?'

First Article from Yahoo: http://news.yahoo.com/s/ap/20091027/ap_on_bi_ge/us_recession_over

Second Article from CNBC: http://www.cnbc.com/id/33474580

The government is apparently ready to announce that the recession is over within the next few days. There are some exceptions. The government is going to state that jobs growth will remain slow with the possibility that more jobs will be lost and unemployment will rise.

So is the recession really over?

I don't believe it is for at least 2 to 4 quarters, if not more. The latest statistics show that consumers are continuing to deleverage, which means that they are reducing their debt and thereby reducing consumer spending. This piece of GDP is by far the largest. You cannot have sustained growth without healthy consumer spending.

So what is causing this jump in growth?

The economy is expected to grow at a 3 percent rate over the next 2 quarters. This is likely due to the massive government spending initiatives/debt creation. It takes 2 to 4 quarters for fiscal changes from government spending to appear in economic growth indicators. This massive stimulus is clearly creating a dead bounce in economic growth.

So when do we emerge?

This economy will be back on track when both banks and consumers have successfully de-leveraged their debt. In addition to this, asset price depreciation needs to stop. This will likely happen when foreclosures slow and many foreclosed homes are purchased and repaired to liveable conditions (thus stabilizing property values).

Declaring this recession over now is very premature and also fails to recognize the NEW risks created from these government initiatives. These risks haven't been seen yet, but I will discuss them in my next article.

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