Saturday, April 12, 2008

Recession Watch - Consumer Sentiment

The latest reading of the University of Michigan Consumer Sentiment Index is the lowest we've seen since the early 80's when inflation was soaring and Volcker was busy jacking up the Fed funds rate to 19%.

At least Bernanke is now talking about the chance of a recession. The talking heads are almost always behind the curve. The issue isn't whether we're in a recession but rather how long and deep it will be.

The only reason there's been any debate at all as to whether we've been in a recession is because of the manipulation of inflation statistics by the government. The real GDP figures reported by the government are overstated due to their ridiculously low calculation of inflation. The lower the inflation figure, the higher the reported real GDP.

Consumption accounts for about 70% of U.S. economic activity, and the U.S. consumer is clearly in retrenchment mode. I expect this recession will be longer and/or deeper than the consensus view. Therefore, it's likely still too early to bottom fish in the consumer discretionary sector.