Recessions and Bathing Suits

Posted on May 29, 2008 by Ben Connard 

My wife likes to shop. Her latest conquest was the perfect bathing suit. The process of searching and finding the bathing suit brings her as much happiness as actually wearing the bathing suit. As she flipped through various catalogs debating between green and pink I suggested that she hold off on picking out a new suit. But she wanted her shopping fix. Maybe she could pick out the gas station we used next time the car needed to be filled up. Think of the possibilities—Exxon blue or Shell gold?

Recent macro economic reports indicate our little conversation isn’t out of the ordinary. Durable goods orders for April were unexpectedly strong. Orders excluding the volatile transportation sector (e.g. planes and cars) were up 2.5%. The day before the Conference Board issued its Consumer Confidence report for May indicating confidence was the lowest it has been for 16 years.

The reports tell two different stories. When the data is analyzed, this dichotomy can be partially explained. Durable goods were up in large part due to increased exports. Retail sales have also been positive, but once gas station sales are removed from the data, retail sales are negative.

In other words, companies are producing goods to be sold overseas and domestic spending is increasingly done on necessities, like gas. Neither reality is particularly appealing to the US consumer—both indicate shrinking discretionary spending, which in turn may explain falling consumer confidence.

Are we in a recession? On an individual level, you may say yes, we are in a recession because I’m spending less on those items that matter to me, e.g. bathing suits, and more on necessities, e.g. gas. However, when considering the overall economy, no, we are not in a recession because even though growth is slow, the economy is still growing.

From an investor’s point of view, the more important factor is that the economy is growing and therefore companies are out there generating good cash flow. For example, companies which sell a lot overseas (e.g. Nike) or produce non-discretionary goods and services (e.g. healthcare) should continue to generate strong sales.

Of course, my wife did order the green bathing suit yesterday…