Analysis/Opinion: Rumors of Recession way Overblown

http://article.nationalreview.com/?q=NmQ5ZGE1YWFhOTMwYTdiNzRiODljZmQwODBmZDlmYzQ

by DanielBMarkham • 18 years ago

8 23 18 years ago

article.nationalreview.com

I didn't submit this as a political piece, although at the end of the article the author makes a political argument (and it's from a political rag)

I submitted it because as startups, we should keep an eye on the economy. We should be able to make it no matter what the economy is doing.Our success should not depend on macro conditions. But I would guess the better our macro view, the better we can pick areas that we might want to explore further at the startup level.

Not sure. Perhaps macro conditions don't matter at all. What do you guys think?

byrneseyeview2• 18 years ago

The macro situation makes it harder to start a startup, for a surprising reason. Startups can get higher returns than the average company because it's cheap for them to bet the company on a new paradigm: going from a 10% chance of X to an 8% chance of 2X is a good deal for them; for a big company, the status quo is a bigger sacrifice -- even if the RIAA found some great way to make artists and users happy with free downloads and shared files, I bet this billion-dollar idea would kill their multi-billion dollar existing business, so they'd avoid it.

In a recession, the chance of a company becoming worthless goes up, so the risk involved in betting the company on a new paradigm goes down. So the problem with a recession isn't that you have fewer customers -- it's that your established competitors will act more like startups.

swombat2• 18 years ago

Macro conditions definitely matter in terms of raising capital... it's a lot easier to raise money in a boom than in a recession. However, beyond such high-level statements, I don't think these articles are actually relevant, since they are common knowledge. The result of the US presidential election is also relevant to start-ups, but please, don't report it here?

I'm pretty sure those of us who are interested in economic conditions already follow those kinds of news elsewhere and have our own opinions about whether we are in a recession or not. Now, if you posted an article that specifically discusses the impact of the economic conditions on start-ups, that would be very relevant.

Also, disagreeing frankly with the article, yes, we are in a recession. The GDP growth numbers cited are adjusted for the "official" rate of inflation. Both the US and UK governments vastly understate the rate of inflation. I'm not familiar with the exact loopholes the US uses, but, as an example, the UK doesn't count food and energy costs (where most of the price inflation is happening) in the official inflation rate, so that it's typically several percent lower than the real rate of inflation.

This means that the Real GDP has actually decreased rather than increased. Which is the definition of a recession.

Lies, damn lies, and statistics.

rgrieselhuber• 18 years ago

I pay moderate attention to the economy at large but at the end of the day, I know I'm going to keep doing what I'm doing and take the same risks.

pqs2• 18 years ago

I think this article is politically biased. It is not only about economy.

swombat2• 18 years ago

And it's wrong, too.

timr• 18 years ago

Indeed. This falls under the category of Not Even Wrong...it's just a partisan political rant, and it makes me sad to see it here. I mean..."Recessionistas"? Seriously? Are we children? Someone else, please flag this thing.

At the very least, any intelligent analysis of what's going on with last quarter's growth should probably include a discussion of the economic stimulus checks that were sent out (and spent) during the same quarter. That money is gone now, and it's pretty widely believed that the growth numbers were a related aberration.

Here's a non-partisan discussion of the same topic: http://marketplace.publicradio.org/display/web/2008/08/28/gd...

And another: http://www.marketwatch.com/News/Story/us-q2-gdp-surges-33/st...

byrneseyeview2• 18 years ago

The submitter said "I didn't submit this as a political piece, although at the end of the article the author makes a political argument (and it's from a political rag)"

So I guess that's been established. And one would expect a Republican talking about the positive results of Republican policies to be biased, wouldn't you?

pqs2• 18 years ago

My point is that the article is much more political than the submitter tells us. The political part is not at the end, the whole article is political.

Maybe, as I'm not American and I don't live in the US, my understanding of the comment of the submitter is different than yours.

mdasen• 18 years ago

The "recession" has been way overblown. But the funny thing about recessions is that they don't need to be brought about by anything real - perceived weakness in the economy is enough to get people to spend less which leads to stores needing less labor and such.

Spending doesn't help the economy (in fact, most economists believe that saving helps more as long as you don't put your savings in your mattress). Consistent behavior does. For example, if people save money consistently, it means that the supply of loanable funds is plentiful and it's cheap and easy to finance business activities. Likewise, if people spend consistently, you know that you will have high sales and that makes business easy.

If people are buying like crazy and then politicians start screaming "recession! recession!" and you stop spending money, stores and manufacturers are going to have a lot of excess inventory that they can't sell.

The same is true of all parts of a modern economy. It's based on the wheels spinning smoothly. If something is a bit out of alignment (different from normal on the negative side), it causes problems. Of course, these are very small problems (as much as politicians try to make them sound like the end of the world). It's not as if you're getting terminal diseases.

tom_rath• 18 years ago

The economy is cyclical. We've been in an extended boom for some time.

As there is no such thing as "The New Economy" a recession will come next.

_b8r0• 18 years ago

You're absolutely correct. However what is different is that the upside of the boom (above what it should be) is so high that the correction is at least almost as big a downside. There are two ways that the market correction can occur, a sharp correction would cause many problems, a slow recession would ease the pain somewhat but would take too long.

The actions you're seeing in the US, UK, EU and Japan are all designed to lessen the steepness of the drop.

nsimpson2• 18 years ago

I'm all for positive thinking, but it's a little early for partisan hacks to start crowing about how excellently the economy is functioning right now. Show me the data in 6 months time.

I nearly fell off my chair on the part where they claimed lenders were forced against their will to make the bad loans for "Affirmative Action" reasons... Wow. Just wow.

anamax• 18 years ago

What definition of "force" are you using?

Banks have been sued for failing to make "enough" loans in "predominantly minority" areas. Regulators have told banks "we're not going to approve your application to do {thing 1} unless your percentage of minority loans goes up."

nsimpson2• 18 years ago

To prevent this from degenerating into partisan political BS, let me say that if anyone is interested in the macro environment and the economy, check out the Economist.

This paper was established to advance free market and free trade principles, and it isn't beholden to any US party (it's a British publication).

http://www.economist.com/opinion/displaystory.cfm?story_id=9...

gojomo• 18 years ago

This article, from tech investor Bill Burnham about what he learned consulting at Fannie Mae in the 90s, is instructive on the very real political pressures to loosen lending standards:

http://billburnham.blogs.com/burnhamsbeat/2008/07/fannie-mae...

(This got 71 upvotes when posted to News.YC about a month ago.)

jorgeortiz85• 18 years ago

I don't know what point you're trying to make.

The article clearly explains that the political pressures came from Fannie Mae itself. It wanted to lower its lending standards, but was barred by Congress from doing so, presumably because the US Govt was implicitly guaranteeing Fannie's debt. According to the article, Fannie Mae's lobbyists came up with the "affordable housing" campaign to pressure Congress into letting Fannie lower its lending standards.

Congress didn't "force" Fannie Mae to make bad loans. Fannie Mae "forced" Congress to change the law so that Fannie Mae could make bad loans.

steveplace2• 18 years ago

Three reasons the GDP was up this quarter:

1) Gov't loaned us our own money in the form of stimulus checks.

2) Prices increased (inflation, but not as how the gov't reported it)

3) More importantly (and related to 2) is the way they collect their data. They add in something called "hedonic regression." That means if a TV costs the same than it does 3 years ago, it's still more valuable because it has 1080p, and that gets added into GDP, and somehow mystically subtracted from CPI.

There's plenty of other reasons why his claim is bullshit, but just a couple more notes:

Recessions are not defined as two quarters of negative GDP. Rather, it's a period of economic contraction. We are in a recession. Anyone who denies that is not looking at the same data as I am. Look at employment, housing starts, credit spreads, equity markets, bond markets, credit default swap markets, CPI (both core and otherwise), and number of bank failures.

Some better resources:

http://bigpicture.typepad.com/ http://calculatedrisk.blogspot.com/

DanielBMarkham3• 18 years ago

"Recessions are not defined as two quarters of negative GDP. Rather, it's a period of economic contraction."

I've begun to hear this over the last year or so. While I understand the sentiment, unless you have a commonly defined measuring stick for "economic contraction", I think it's a generalization without a point. Just by googling around, it seems pretty clear that the rule-of-thumb is a negative change in GDP over two consecutive quarters.

Now you can argue that GDP changes aren't reflective of the change in the economy, but if you do that, then you're stuck with coming up with a new definition. Not only that, but you would have to retrospectively go back and apply your new definition to historical financial data. Then you'd have to make an argument that the new definition matches up with the actual perception.

I'm still on the fence about this. I think I'll wait until after the election heat cools off to read up some more. I hear you about the indicators you mention, but there are a lot of ways to slice a cake, and growth is growth.

DanielBMarkham3• 18 years ago

This moderation system sucks.

There was _nothing_ in the parent comment that made it any better or worse than any other comment. It was on-topic; it expanded the conversation; it didn't really make some big attack. It was just an honest observation.

Go ahead -- down mod me for this one too. But when you downmod, you should be required to explain yourself.

steveplace2• 18 years ago

Don't know why you got downmodded...

Economists are generally lagging indicators when it comes to the market. And they don't have a measuring stick, they have a basket full of them.

From BusinessWeek:

"Many people think the definition of a recession is two consecutive quarters of decline in the gross domestic product. But that's a misperception. [the NBER] will look beyond such simple metrics, weighing monthly GDP estimates, employment data, income, industrial production, and other factors. To call a recession, they'll look for clear signs of "a significant decline in economic activity spread across the economy, lasting more than a few months."

Any call, if it comes, is going to take a while. The NBER usually takes 6 to 18 months to decide when a recession starts or ends. Hall's committee didn't announce the end of the 2001 recession until a full 20 months after the fact...

Also, an increase in GDP does not necessarily mean "growth." The way that they have measured this has changed over the past decade, and I think their analysis techniques are biased.

Analysis/Opinion: Rumors of Recession way Overblown

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