Monday, September 27, 2010

Warren Buffett Says U.S. Still in Recession

Warren Buffett says that the U.S. is still in a recession despite the fact that by the usual standard, the recession is over. He claims that his definition better reflects the economic realities of average people.

To understand what Buffett is saying, consider the following chart of a hypothetical history of Gross Domestic Product (GDP), a measure of the output of an economy.


GDP starts to drop at time A, begins to increase again at time B, and recovers to its previous high at time C. By the usual definition, the recession lasted from A to B, and the recovery started after B.

But Buffett says that people are still suffering while GDP levels are depressed. He says that the recession is from A to C and that the period from B to C is just a “technical recovery”.

Just because things are improving, we can’t conclude that things are great. At some point in the winter it starts to get warmer, but it is still cold. Winter is over when it warms up, not when it stops getting colder. As is usually the case, Buffett makes a lot of sense.

4 comments:

  1. I like the winter analogy. I kind of agree with Buffett on this, but I think it's important to celebrate the return of growth too. Just knowing that things aren't still getting worse might encourage people to get out and invest and spend, which might give the economy further growth.

    Still, the US economy is still very weak, so claiming the recession is over sounds disingenuous. So many people are out of work, and house prices and sales are still not recovering.

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  2. Do you think Buffett is busy buying more stock (while the U.S. economy is weak)?

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  3. @Gene: It's definitely true that it's nice to know that things have stopped getting worse. But Buffett has a point as well.

    @Financial Cents: Buffett's writings make it clear that he makes his decisions about stock purchases based on the merits of the company and price, and he doesn't take into account macroeconomic conditions. That said, he may be buying stock in companies he likes but whose stock has been beaten down. I prefer to own BRK than to try to track Buffett's purchases.

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  4. I think Warren Buffet is an investor who knows more than he lets on to the public. I would imagine that he has people working for him everywhere that relay information to him and he has to digest it all and make moves that don't tip his hand, but all the while generates amazing wealth. I also see that Level 3 communications will probably get broken up by the government due to its vast size and enormous debt load and auctioned off. The bidders will be Google, AT&T, Verizon, and Akami. The question will be, who will get the control of the amazing network that Level 3 has built. What will also be interesting, is to see if one of the bidders buys Level 3 before the government gets its hands on it. Time will tell. What would happen if Google actually bought it out? Can you imagine the control it would have over future media distribution across North America and Europe. Level 3 may be in debt up to its eyeballs, but it is Cinderella and holding the glass slipper. Who is going to be the Prince and take care of it?

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