Does positive growth in Q2 or Q3 mean the recession is over?

Not necessarily. There’s a lot more to it than just GDP.  Last year at almost exactly this time, I mentioned this in my post Recession while GDP is growing? because a lot of people were getting excited about the fact that Q2 GDP was going to show positive growth. But GDP is only one of five factors. The others are industrial production, employment, retail sales and personal income. 

Just because GDP is positive doesn’t mean we’re out of recession.  After all, we’re still shedding 3 or 400,000 jobs a month.  That sounds a lot like a recession to me.  I don’t expect that to change until late this year or early next year. And back in 2008 we had two quarters of positive growth, yet we were still in a recession. Look at the chart below at the area highlighted in Red to see what I mean. Q1 and Q2 2008 showed GDP growth (sorry for the small size).

You may recall my post at the beginning of the month on inventory corrections.  I said that my worry was that the increase in production was mainly driven by the inventory cycle and that underlying demand has not increased. The crux of my statement is the fact that businesses respond when inventories are low by producing more. But, demand is still so weak that the inventory/sales ratio really hasn’t declined significantly at all despite the drop in inventories. Take a look.

I got this chart from the Census Bureau.  And Stephen Roach, Morgan Stanley’s Asia head, shares this same worry, not just for the US but globally.  So when we get the GDP report next Friday, we might could (as my grandmother would say) see positive numbers for the change in GDP.  Some people will be dancing in the street, proclaiming the recession is over.  Hold the phone on that one though, because you’ll know that it doesn’t really mean anything until it is confirmed by the other four metrics that we should be watching.