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Iron Capital Insights

  • Iron Capital Insights
  • August 8, 2020
  • Chuck Osborne

What’s in a Word?

“You keep using that word…I do not think it means what you think it means.”  ~ Inigo Montoya, “The Princess Bride”

Why do they keep changing the definitions of words? It seems like every time I get a good handle on the English language they go and change definitions on me. Is it any wonder we have a hard time communicating with each other?

For example, I know what a vegetarian is, but some would cheat. They would say, “I’m a vegetarian but I’ll eat fish.” Okay? Fish aren’t vegetables. So, then came vegan, which was a little more confusing. I thought I understood until I was eating with a vegan friend, and he asked for some honey. Can vegans eat honey?

Now people aren’t vegetarians or vegans, they simply “eat plant-based.” I am doubly confused. First, people don’t eat plants; insects eat plants. People eat fruits and vegetables, which come from the plants from which they grow. No one has ever come home from work and looked at her husband and said, “What do you want for dinner? I’m in the mood for some boxwood, we have a couple in the front walkway that need trimming.” Secondly, what does “plant-based” mean? I can tell you what it doesn’t mean – it doesn’t mean plant. So, plant does not mean fruit or vegetable, and plant-based does not mean plant, so what is it? I don’t know, but I’m not eating it.

© brazzo

I have never been one for food fads anyway, but I thought I had a pretty good handle on economic jargon. For example, the word “recession.” As long as I have known, a recession is two quarters in a row of negative economic growth. Based on the initial reading for 2nd quarter 2022 GDP, we just had the second quarter in a row of negative growth. So we are in a recession, right?

Many people are saying no, some of whom are politicians who have an incentive to deny being in a recession. There is a long history of politicians from both parties denying the existence of a recession on their watch. However, this time it is not just the politicians – there are many financial pundits saying we are not in a recession. The truly curious thing is that those same pundits will then say with undue confidence that we are going to have a recession, but we are not in it yet.

Personally, if I get a vote, it will be to stop changing definitions of words. That means I believe we are in a recession. I do understand why many are saying otherwise; this is not a normal recession, if such a thing exists. It certainly isn’t a financial crisis like we had 2008, or a complete shut-down like we had in 2020. Actually, the jobs report just came out: the economy added approximately half a million jobs last month, and the unemployment rate went down. That doesn’t sound like a recession, so what is happening?

Inflation is happening. Our government reports “real” gross domestic product (GDP). In other words, it is adjusted for inflation. The economists at the U.S. Bureau of Economic Analysis (BEA) take the actual growth of the economy and then adjust it based on inflation. What that means is that nominal GDP was likely positive, it was just up less than inflation. The economy is growing, it is just not keeping up with inflation, which is growing faster.

To see this more clearly one can look at Disposable Personal Income (DPI), which the BEA releases in both real (inflation-adjusted) and nominal, or what they call “current dollar.” According to the BEA, current dollar DPI increased 6.6 percent in the second quarter. However, inflation was higher, so real DPI decreased 0.5 percent. We had more money in our collective pockets, but less actual spending power.

Most recessions that have taken place over the last 30 years have occurred in low- to no-inflation environments. In those cases, there wasn’t such a large gap between real and nominal. If we had real GDP going down, we likely had nominal GDP going down too, which meant higher unemployment and worse economic conditions than we have today. We have also gotten better at prolonging economic expansions, which has meant fewer recessions; the trade-off has been more severe recessions. Whether that has actually been worth it is a question for another day.

Are we in a recession or not? I say yes, because I believe words must have clear definitions. The Old Testament tells us that in the early days of human existence we all spoke the same language and cooperated with one another to build a tower. It was going to reach all the way to heaven. God didn’t like that, so he mixed our language so that we could no longer communicate. Once we stopped communicating, we stop cooperating. Sound familiar?

© mammuth

Plants are used to decorate our yards and occasionally our houses as well. We grow them, we don’t eat them. “Based” means it came from a laboratory, not nature. History tells us not to eat anything that comes from a laboratory. Fruits and vegetables are things that grow in nature that humans eat. A recession is a slowdown in economic activity defined by two consecutive quarters of negative GDP growth.

We are in a recession. It is not severe, and as long as employment holds up it may never become severe. Still, we need to call it what it is. It’s a recession. Things are not great, but they are not so bad that we have to resort to eating plants. It’s summer, which is peach season. Eat a peach instead – it’s a fruit, and it’s delicious.

Warm regards,

Chuck Osborne, CFA
Managing Director