My belief is that the US economy was not in a recession until as late as July or August of 2008.  Housing was in a depression, but not the rest of the economy.  GDP, excluding housing, has not yet had a reported quarter of negative growth, although that will change once the fourth quarter of 2008 is reported.  The non-housing economy grew through September, although the third quarter was virtually flat.  As a result, we believe that the cause of the recession was what happened in September.

That event, of course, was the failure of Lehman, followed by the failure of the initial TARP plan, after which the President went on TV said we could lose our jobs, pensions, and houses, but “don’t panic.”  Everyone panicked.  This caused a drop in the velocity of money.  It was a textbook example of how to create a recession

The last time this happened was in 1907, and that recession lasted a year.

According to Milton Friedman and classic economics, the way to get out of this kind of a recession is to print a lot of money.  It is very clear we are doing that.  The panic is beginning to subside.  I expect a v-shaped recovery - not a u- or l-shaped recovery or a long drawn out recession. We were not in a recession until September.

Financial advisors need to remember that reported data is lagging.  The employment report last week was ugly, but the data was from early December and reflects decisions made by executives as far back as October or November.  It’s old data.  But many act as though the employment data is real time.  It’s not.  Car sales actually improved in December over November.  Holiday spending in December, according to Bloomberg, was down 2% versus last year, but that is a better report than mid-November reports, which showed down 4%.

Construction data for November was not as bad as most people thought.  Corporate and public building were both robust.  Real (inflation-adjusted) earnings were up about 4.5% in December over last year, mostly due to a drop in oil prices.  Consumers are now saving the equivalent of $425 billion, due to the drop in gas prices since June.  This actually offsets the loss in income from rising unemployment.  The total pool of earnings available to workers is up 1/10 of a percent in December 2008 over December 2007.

Some of the panic is subsiding.  Things are not good, and I don’t want to be cast as a Pollyanna.  But many pieces of data have begun to show an improvement in the economy.

Housing prices will decline another 10% and that will take about a year.  The inventory of unsold homes is still too high, and it will probably take a year to work off inventories.  I expect the recovery to begin in the fourth quarter of 2009 or the first quarter of 2010. 

There are pockets and regions that are basically back to normal.  These include smaller college towns, many of which are in the mid-West, which have seen population growth.  They may have had excess building but no subprime lending.  In those areas there are normal inventories.  For many areas there will be better data sooner than the end of this year.