Back to the Beach Bet

Last August, I made a bet with a hedge fund guy. He was sure that the economy was going into the tank and that the US would plunge into a deep and prolonged recession that would start at the end of 2007 and last well into 2008. I countered that I didn’t think that the US would see two negative quarters by the end of the first quarter of 2008. On the beach at Ditch Plains, Montauk, the bet was wagered: the winner would be treated to a large Sicilian pie from Umberto’s of New Hyde Park. I have resisted calling until the final revisions to GDP are in, but I am starting to think about what toppings I want on my pizza.

The bet never contemplated all of the wild events that have occurred since then, but this week, both the New York Times and Wall Street Journal noted that while the economy is hurting, it has not yet met the non-official definition of a recession, that is, two consecutive quarters of negative GDP. GDP for Q4 2007 and Q1 2008 was lame at +0.6%, but at least it was positive. The Times’ David Leonhardt noted that “you can make an argument that the economy has survived its period of maximum danger.”

Of course surviving does not equate thriving, but it is a far better outcome than many thought possible just six weeks ago. I like to call this period “Post-Bear Stearns” because in the time since the near-collapse of the fifth largest US investment bank, financial markets and the economy retreated from the brink of disaster. Credit goes primarily to the Federal Reserve, which has been both creative and aggressive in staving off a more significant crisis. The collective sigh of relief continues to reverberate from Wall Street to Main Street. Maybe that’s why retail sales were better-than-expected when they were released this week.

That doesn’t mean that everything is honky-dory. The housing market is still lousy (official term), job losses may have eased, but it would be better if the economy created jobs instead of losing them and then there’s that oil problem. Adding to that list, Federal Reserve Chairman Ben Bernanke said that conditions in financial markets are “far from normal…pressures in short-term funding markets persist.”

Where does that leave us? Well, the economy is weak and may in fact worsen in the coming months. Consumers who have held up pretty well might buckle under higher energy costs this summer and another shoe could drop in the credit crisis. But thus far, we have come through this difficult period in pretty good shape. And of course, it looks like I will be winning that pizza because the bet was a time limited one.