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Recession over -- so what?
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What does latest economic data mean to you?
Yesterday, the Commerce Department reported that the U.S. economy grew at an annual rate of 3.5% during the third quarter, after declining in five of the last six quarters. By definition, this means the latest recession is over, for now. It doesn’t mean the upward trend will continue or that the economy won’t sink in the 4th quarter. It just means that economic activity in the last quarter was greater compared to the quarter before.
At the same time, while consumer spending was up in the quarter, it was down in September. Consumers make up about 70% of the economic activity. The increase in consumer spending in the third quarter was mostly due to the Federeal Government's "Cash for Clunkers" program that has now finished.
What are we to make of this conflicting economic data and what should we do as investors? As always, the future is un-knowable and this economic data does nothing to clear up the fog of the future. On the one hand, fewer people are filing for unemployment, but on the other hand, unemployment remains at or above 10%. On the one hand, consumers seem to be spending more, but much of that stimulus was from a government program that has ended. One the one hand, Amazon.com profits are up, but on the other hand the stock market rally seems to have stalled for now. On the one hand, people are saving more, but on the other hand, they’re spending less.
Seems like the situation is pretty normal to me. Good news and bad news fight equally for headlines, with bad news having a slight edge in the media (sells better). As a long-term investor, what should you be doing? My answer is the same as it usually is – worry about the things you control and ignore the rest. That is:
- Save at least 10% of your pre-tax earnings every month
- Control your spending so you don’t go into debt
- Invest efficiently and wisely in a diversified portfolio of index funds
- Do good quality work
- Focus on your important relationships
- Take care of your health.
The economic news will always be mixed and reading media reports is confusing and not much help. Focus on the things you control and this too will pass.
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