Warren Buffett: "This Recession Ain't Over"

Here's Warren Buffett yesterday at his second home on CNBC:                                         

I think we're in a recession until real per capita GDP gets back up to where it was before. That is not the way the National Bureau of Economic Research measures it. But I will tell you that to any, on any common sense definition, the average American is below where he was before, or his family, in terms of real income, GDP. We're still in a recession. And, and we're not gonna be out of it for awhile, but we will get out of it.

Fair enough. Here's where that puts us:

Source: Federal Reserve, author's calculations.

Source: Federal Reserve, author's calculations.

So we need just over 3% growth to get back to where we were. How difficult is that? Since the bottom in early 2009, real GDP per capita has grown 2.11%. By Buffett's metric, then, we're maybe one-third of the way out of the woods.

I like this metric, although I'm not sure it's very meaningful to most people. Just as NBER calling the end to the recession meant exactly nothing to anyone unemployed or about to lose their home, per-capita GDP can increase while millions of individuals hardly notice. I think a more meaningful number is unemployment. Until unemployment falls to where it was before the recession started, it's going to feel like hell for a lot of people. How long until we're back to those glorious days? The Organization for Economic Cooperation and Development says it won't happen until 2013, which seems like a reasonable estimate.

What's interesting is that legions of companies have already made it back to where they were before the recession started. Fully 48% of S&P 500 companies earned more over the past 12 months than they did in 2007, with a median gain of 33%. It isn't hard to find companies whose share prices are now at all-time highs, including McDonald's (NYSE: MCD  ) , Philip Morris International (NYSE: PM  ) , and Amazon (Nasdaq: AMZN  ) . Given the severity of our crash, that's pretty remarkable.

And good for them. But for most of us, as Buffett says, "we're not gonna be out of it for awhile, but we will get out of it."

Fool contributor Morgan Housel owns shares of Philip Morris International. Amazon.com is a Motley Fool Stock Advisor selection. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 24, 2010, at 4:44 PM, chablew wrote:

    One of the better definitions of a recession. It conveys an important feaure of the dynamics involved, absolute levels count a lot. I've been surprised how few analysts 'get' this.

  • Report this Comment On September 24, 2010, at 5:40 PM, dibble905 wrote:

    so, we should be back to our previous highs around... 2012? how timely.

  • Report this Comment On September 24, 2010, at 5:41 PM, royvb wrote:

    Well, no one quarrels with the Oracle, but, with kindness, I'd suggest he just define a new metric and not try to cram his view of what a recovery would be onto a term that has had a pretty precise definition for a long time. Trying to say that we have a recession until we get back to where we were is a measure of status, not direction. When we stop declining, we stop recessing. It's that simple.

  • Report this Comment On September 24, 2010, at 5:57 PM, Marshalldedr wrote:

    After hearing from market commentators that Warren Buffett stands to benefit due to his extensive holdings that evidently insure against value loss and other types of insurance vehicles I have stopped listening to him. His opinions are tainted with conflict of interest. He is smart and has his holdings covered either way but shorting is where Berkshire is cleaning up if what I heard was correct.

  • Report this Comment On September 24, 2010, at 6:00 PM, mtracy9 wrote:

    "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer. I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sorts of things. But stocks were cheap." --Warren Buffett

    http://shouldersofgiantsinvestor.com

  • Report this Comment On September 24, 2010, at 6:15 PM, jm7700229 wrote:

    I agree with ROYVB. The definition of a recession is what it is, not what Warren wants it to be. Unemployment is only a single metric. So is GDP. If suddenly all of the unemployed moved to Greece would that mean the recession is over?

    I'd like to see unemployment reach a low point quickly. I'd like to see GDP recover overnight. I'd like to see house prices return to 2007 levels. But the recession is over and has been for a year.

  • Report this Comment On September 24, 2010, at 8:12 PM, killerpants wrote:

    I think the main message to gain from Buffett is that the news shouldn't be interpreted overly optimistically.

    I also think that looking at any sort of point metric like employment level, GDP/capita, GDP growth, etc is a fairly useless way of analyzing the situation.

    Although every sector was affected by the Great Recession, I would imagine not all of them are bouncing back at the same pace. I'd even imagine some of them are still recessing (like housing) either because they'd grown too big in the first place, their target consumer demographic has lost a lot of income, or some other reason.

    I'd say that growth in GDP/capita and GDP growth are both fairly equally useless guages of how the "average American" is doing.

    An index based on median real income growth, structural unemployment amongst the people who were earning between the first and third quartile income, and wealth growth amongst those earning (or previously earning) between the first and third quartile income would be the beginning of a reasonable guage of how the "average American" is doing. However, this would still be a point metric, and put out of context is still fairly useless.

  • Report this Comment On September 24, 2010, at 8:24 PM, killerpants wrote:

    As somewhat of a tangent, I though of the following while writing my previous comment, so I thought I'd jot it down.

    Our focus on economic growth (insert whatever growth metric you chose here) stems to some degree from flawed economic assumptions like markets inevitably moving towards equillibrium output levels in the long run. We ought to put more focus on efficient allocation of resources (did we really need enterprises focused on building gigantic houses for people who couldn't afford them).

    I'm not saying some government agency ought to be in charge of that (I like to think of myself as a capitalist) but the American populace itself could do to be made more aware of efficient allocation as a large economic concern. Ultimately, the consumers are also the voters, so they are in charge of what they demand from their organizations, private and public.

  • Report this Comment On September 24, 2010, at 9:01 PM, tomd728 wrote:

    At least this que has no mention of a "double dip"

    or "The recession is over". Not a mention of the

    "New Normal" either...........

    Ahhhhhhh to be free of the hack talk if only for the moment.

    No......."A recession is when your neighbor is out of work.A depression is when you are out of work".

    Thank you for your thoughts.

  • Report this Comment On September 24, 2010, at 9:48 PM, himagain2 wrote:

    Sometimes I wonder if it is old age that makes the difference in insight. I know it did make a big difference in me. :-)

    Look my young friends, recessions/depressions,corrections, etc., are polite terms for the regular culling of the flock, as distinct from fleecing - the everyday activity of Our Owners.

    It used to be the regular 20 year or so lovely wars, which "re-aligned" things, while simultaneously getting rid of surplus population.

    However, there was a "positive feedback" control like the pressure gauge in a boiler. Both sides ran out of food, as a rule.

    With the advent of the PROCESS CONTROL computer, the game changed.

    Who needs people any more? (Except as body servants.)

    I'm so old I remember complaints about cheap Jap manufacturing, then Taiwan, then Thailand, then China, etc. It's a great idea to move manufacturing to the cheapest point, but in fact, those places are for the most part today, becoming highly automated.

    My friend in China recently complained that he was up for 5 million US to automate his plant - he couldn't compete with his manual based operation against automation.

    But his biggest worry was the political kickback as he dumped 900 workers into the street. There aren't any farms to go back to, anymore.

    The Chinese are going to follow Japan into manufacturing autos in the USA - the deals that they can write today - no taxes, no pesky unions, no pension funds, means they can manufacture economically on the spot without shipping costs.

    As cheaply as at home?

    Certainly within 10 years it will be.

    Most of the "money" lost in the this last great cull, did not and doesn't exist.

    What is lost irrevocably, is the pre-eminence of status that the US enjoyed for so long. It was the place to be.

    Who wants to be there now?

    You can't trust them any more (Banks, govt).

    The 5 smartest financial operators that I personally know all still make the money in the sucker markets of the USA, but none of them live there, or have their money tied up there.

    No, this time it is different. I no longer believe that the US CAN recover. That is why there was such an enormous flight of capital out of the country in the last year.

    (Where did all the "bailout" money go? 4th Reich?)

    To get a grasp on the future of the USA, look at the state of most of the population in most countries of the world.

    The party looks to me like it is over.

    The question is what now for the other 80% of the population of the USA?

    The day of labor is over.

    The day of bureaucracy is not.

    But who is going to pay the taxes to even keep the bureaucracy well-fed?

    The debts of the USA are absurd. A situation like Germany after the first war to end wars. Currency worth less than the paper it was printed on.

    When an individuals debts are so monstrous that there is no way of him paying them, we in the West have a system called "bankruptcy" an escape hatch. But that is the end of that individuals future.

    The USA is more than bankrupt, there is utterly no hope of even paying the interest due, much less the capital. (Incidentally, paying to who?)

    First, you would have to manufacture something that the world wants/needs.

    Then do it competitively.

    I believe that this is the plan behind the destruction of the "low economy" in the USA, but it is too late.

    If someone could enlighten me, I would be grateful, as I fear for many friends in the USA, who are mainly getting old, like me and they or I don't have any rosy view of their future, at all.

  • Report this Comment On September 24, 2010, at 10:21 PM, Alwayzwrong wrote:

    Not to criticize the OECD, but their unemployment figures seem to be projecting higher gains in employment in 2012 than I see even when using the most optimistic figures in my models. The further you look out, the less accurate the models become. I don't anticipate a full recovery in employment until much later, but a lot can happen between now and then.

    If the OECD happens to be correct, this would be a very robust recovery, historically speaking.

  • Report this Comment On September 25, 2010, at 12:25 PM, plange01 wrote:

    last week buffett said it was over!

  • Report this Comment On September 25, 2010, at 3:08 PM, peter941 wrote:

    Growth for most companies this past couple of years is only in the narrow sense of earnings and has resulted because they tightened their belts and laid people off. That they know how to do this effectively and survive is a good thing, but it not in any way indicate expansion.

  • Report this Comment On September 25, 2010, at 8:56 PM, lctycoon wrote:

    If unemployment is anywhere close to 5% in 2013, then I will eat my laptop. While I hate the phrase, "This time it's different," in this case it's true. The USA is rapidly losing capital to more friendly countries and losing its manufacturing base to more affordable countries.

    Himagain is correct - the USA cannot recover. Not without major changes. The presidential budget predicts trillion dollar annual deficits at 4% economic growth. The USA will not grow at 4% annually for the next ten years. In order to pay off our debt, barring significant reform, the USA will need to grow at double digit rates for the next 75 years. That's impossible, no matter how optimistic you are.

    The USA CAN recover, assuming people will give up this idiotic attitude of entitlement and roll up their sleeves and make it recover. I'm not holding my breath. Judging by all the people that I encountered back in college (not that long ago), the entitlement and laziness epidemic is worse than ever.

    I hate to say it, but what the USA may need is another Great Depression. After that, it might be able to recover. But we'd need something to drill the sense of responsibility into everybody.

  • Report this Comment On September 26, 2010, at 10:54 AM, justjo121 wrote:

    I believe that California COULD lead this nation out of its economic woes when they make marijuana legal for agricultural and industrial purposes! Not only will they realize savings in the law enforcement arena and taxes for recreational sales, but many many jobs and manufacturing and exporting. Inside of a generation, CA could become an energy exporting state! Again, CA could be a leader!

  • Report this Comment On September 26, 2010, at 4:50 PM, cztrain wrote:

    Well, this is closer than most comments have been regarding the end of this recession. I agree that when unemployment gets back to around 5-6%, we're about out of it.

    cztrain

  • Report this Comment On September 27, 2010, at 8:51 AM, Mybesteffort wrote:

    Highly reccommend Charlie Munger,s address to the universigy of Michigan. It will do those of your that are overly negative on the USA a lot of good. Almost anyone alive today needs very much to hear what Charlie has to say. Besides that he is very wise and enertaining.

  • Report this Comment On September 27, 2010, at 9:41 AM, mikecart1 wrote:

    Warren Buffet is an overrated moronic investor. Last person I listen to these days is him despite his billions in net worth. He is like that basketball player that is naturally gifted with height, size, and speed yet can't shoot a jump shot properly, but still gets rich anyways.

  • Report this Comment On September 27, 2010, at 1:49 PM, hegibson wrote:

    Perhaps one of the reasons that many corporations are doing so well is that they got rid of a sizeable chunk of their employees (hence the high unemployment rate). Good for them, sad for the unemployed. But I would agree that unemployment might be a more humane way of determining whether or not a recession is over.

  • Report this Comment On September 28, 2010, at 1:08 PM, SpaceVegetable wrote:

    The timing of the "official" end of the recession makes sense to me, since that's when I saw a significant increase in job leads. By August 2009, I had 3 job offers. The only caveat is that two of the three jobs were contract jobs. I ended up taking one of the contracts, since I prefer that mode of working. Plus, it paid twice as much as the permanent job. Sure, I have to manage my own benefits, but better me than some bunch of suits deciding my health insurance coverage options based on costs alone.

    Last week, I had a total of 63 emails and 9 phone calls from recruiters with jobs -- about half of them contract and half permanent. If you're in the software field, then there are plenty of jobs to be had. You may have to go the contract route, but better that than unemployment. Besides, most of the contract staffing firms offer some level of benefits these days, usually at fairly reasonable costs.

    So, yeah, I think the recession is officially over, despite the ongoing unemployment issues for some people. Employment does usually lag the other economic indicators in a recovery, and contract/temp work usually comes back first. This is exactly what happened during the last recession, too.

  • Report this Comment On September 29, 2010, at 1:29 AM, badnicolez wrote:

    My biggest problem with recent reporting is "they" say the recession officially began in December 2007 because that's when we started losing jobs (yet GDP was not in decline), but now say the recession ended when GDP began increasing again, despite the continued hemorrhaging of jobs and high unemployment.

    I really wish "they" would pick one measure and not try to have it both ways (depending on which party is in power and their oh-so-obvious bias).

    This leads me to assume they think we're A: not paying close attention, or B: too dumb to notice that they keep changing the basis for determining the beginning and end of recessions.

  • Report this Comment On September 29, 2010, at 11:44 AM, JFMann wrote:

    When economic results are defined by the politically motivated, you get ridiculous interpretations like recent statements by Mr. Buffet.

    I am constantly amazed at how, with very few exceptions, those commenting on the subject of "recession" conveniently neglect to even hint at what their definition of recession might be.

    Perhaps because of this general lack of specific intention, Mr. Buffet has tossed out a completely new definition. Although refreshing, his "new and improved" definition is nonsensical.

    First, the term "recession" is a basic derivative of the word "recess", used as a verb, which means (or should mean if we use English as a common language) to decrease or go back.

    Therefore, if some measurement is increasing (or at least not decreasing), it is not in recession.

    Ask yourself, when we talk about "recession" in economic terms, what exactly is supposed to be recessing, or, more understandbly, decreasing?

    If, as suggested by one commentator above, you really mean to define economic "recession" only as a decrease in employment (or an increase in unemployment), then say so directly. But also realize that your new definition has no relation to the definition of economic recession used generally by economists for at least the past 70 years.

    According to the NBER, it is "economic activity" that is in "recession", even though the definition of "economic activity" is so nebulous as to literally be meaningless to anyone except themselves. Conveniently for the politically motivated NBER, the vast majority of Americans (to the extent that they care at all) blindly accept the NBER pronouncement as if handed down from the proverbial mountaintop temple. NBER has learned that they have the power to manipulate "economic activity" into whatever form is necessary to fly with the political winds.

    NBER has gradually changed the definition of "recession" over time. Whether or not this change is warranted, it is important to realize that comparisons to past "recessions" are now misleading at best.

    Mr. Buffet "neglects" to note that if his "new and improved" definition were to be used consistently, the length of all past recessions, and even the Great Depression, would be extended so long that, if you believe him, there would barely have been any economic expansion during the past 80 years!

  • Report this Comment On September 29, 2010, at 2:01 PM, JFMann wrote:

    Ok, I exaggerated in last paragraph of previous comment.

    Adjusted (so-called "real") GDP per capita has very nearly the same trajectory as adjusted GDP since population does not change all that much during short periods, especially in recent years.

    Therefore, adjusted GDP per capita correlates with the time period of "recession" as declared by NBER (or anyone) just about the same as adjusted GDP does.

    Mr. Buffet is proposing / claiming that, not only should GDP per capita be the (apparently) only factor to define "recession", but also that the "recovery" period (for GDP per capita), from recent low point to former high point, should also be considered part of the "recession".

    Obviously, adding the recovery period (for GDP, unemployment or any factor) to the downturn period greatly increases the total length of time for the newly defined "recession".

    However, to add a period of upward movement (the recovery) to a period of downward movement distorts the meaning of "recession" beyond recognition.

    The key point is that.......if you are then going to compare this distorted definition of "recession" to past recessions, you should of course redefine the length of those past recessions to fit the new, distorted definition.

  • Report this Comment On September 30, 2010, at 1:18 PM, BlancheDuB wrote:

    Yeah, yeah, Warren. We love ya. But what you're telling us is nothing new. And, yes, many corporations are making huge profits again. But why aren't you addressing the fact that this country will NOT get out of this recession until these corporations start hiring again!! And why aren't you mentioning the fact that they WON'T hire because they'll continue to squeeze the life out of their remaining employees rather than hire under an Obama administration! Why don't you mention that they're waiting for the mid-term elections before they hire! or maybe even into 2012!! Warren! Say it like it is! The middle class is being willfully eroded because of politics and greed! Business as usual.

  • Report this Comment On September 30, 2010, at 1:30 PM, ClueFool wrote:

    I hate to say it, but I have to agree with BlanchDuB. This might be said of the tax law issues as well.

  • Report this Comment On September 30, 2010, at 8:50 PM, beawinner2 wrote:

    "The middle class is being willfully eroded because of politics and greed! Business as usual." Wakeup 3rd world America, yes, YOU!

  • Report this Comment On October 01, 2010, at 12:20 PM, rlesperance wrote:

    Hi,

    Is anybody going to tell me how we can even think about better world economy when the only way out of the worldly environmental mess we are all in is to consume about 80% less than we are now, reducing de facto jobs or at least work time for everybody ?

    While short term returns on investment can be good or even excellent in a small number of world wide companies, how can we seriously think that the usual economic rules can continue without a drastic change of the basic capitalism system ? Come on, greed as also got everybody blind and deaf ???

    Man can change everything ... If he has created this system that worked for years, he can change it again. But seriously we have to take into account the real problem, and that is we have to urgently save the planet. After we will, in the long term regain our power over problems and economics difficulties.

    Now, we are trying to save the planet without putting some efforts into it ... Let's get to work fast and seriously. Let's start speaking about the real world, about true reality not the dream of our greed fantasies.

    Regards to all of you.

  • Report this Comment On October 01, 2010, at 1:29 PM, snowmon wrote:

    "Real GDP gets back to" before when exactly?

    By this GDP/Capita method, we should, as a people, be as prosperous as we were in 2005, and more prosperous than we were in 2000. Seems like a very flawed metric.

  • Report this Comment On October 08, 2010, at 6:55 AM, TopAustrianFool wrote:

    Ha ha... The recession has been over for a long time. Buffett and you need to hit the economic textbooks. This is a depression. Not the Great Depression by any measure, but a depression indeed.

    After a deflation of bout 17% right after the Panic of 2008, the Fed. inflated prices back to 2005 levels. This is a depression, but you need to conduct an economic analysis, grabbing specific statistics will not help you understand that.

    How can you have an economy of over 10 Trillion $$, supposedly growing at 1-3% and still have growing unemployment? Inflation is the answer. If you have no growth in employment, you have no economic growth. Growth means more wealth and need for goods and services. Hit the books...

  • Report this Comment On October 08, 2010, at 7:02 AM, TopAustrianFool wrote:

    "What's interesting is that legions of companies have already made it back to where they were before the recession started. Fully 48% of S&P 500 companies earned more over the past 12 months than they did in 2007, with a median gain of 33%."

    Interesting? Ha ha... Again mostly due to inflation!!! It is not real, if it was then they'd be hiring.

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