Economic comparisons

We are quickly moving to a period where economic data for this year will actually be better than it was last year at the same time. After the Lehman collapse and the rapid deterioration of the economy in the last quarter of 2008 and the first quarter of 2009 things got pretty bleak. So, since there has been some improvement, we will enter a period where instead of numbers showing x% below last year, it will be x% above last year.

While this will be refreshing in a sense, it is as meaningless as the bad comparisons were. In the last quarter of 2008 we entered what has to be considered a panic period where an economy that was struggling essentially collapsed as fear prevailed. If you think about what happened, high energy costs and the resulting drop in consumer demand coupled with unsupportable home prices led to declines in real estate prices that caused sub prime mortgage backed securities to become almost worthless. The drop off in home equity and the loss of construction jobs plus the seemingly endless stream of bad economic news caused a dramatic and scary reduction across the board in costs and employment by American industries.

Of course, the reaction created the basis for the earnings we saw last quarter as despite significant declines in total sales cost reductions enabled firms to generate profits. This was the end of the recession, as profits, even at reduced sales provide a foundation for future growth.

Of course whether the Government stimulus had much to do with this is a difficult question. To some extent it prevented some jobs from being eliminated but considering how slowly it has been implemented, much of it is yet to be felt. It certainly had a negligible impact on demand and the demand lost from the drop in home equity will not easily be replaced.

It is more likely that the companies, reacting to the drop in sales have simply entered into a reverse growth mode and scaled back operations sufficiently to be profitable. This is a sustainable act since the cost dropped will only be added back as growth dictates and in fact will most likely be added at a more productive level than they were previously.

Growth needs to be measured month over month to get a picture of what the status of the current economy actually is. Year over year comparisons don't work in the current scenario.