The words “economic recession” put investors on edge, no matter how strong their investments. The best stocks to buy, of course, are the ones that stay strong no matter the economic climate. But Wall Street doesn’t always see it that way, putting more importance on a nine-letter word than on the bigger picture in the stock market.

In case you’re wondering, the technical definition of a recession is two consecutive quarters of declining GDP. We haven’t met that standard in the U.S., but that certainly doesn’t mean things are rosy. The bottom line is that a few segments of the economy have managed to keep us from that dubious label while other industries have taken quite a beating.

Thanks to the energy business in Texas and the farms in Midwestern states, the U.S. economy is not officially in a recession, despite the fact it feels like a recession on the East and West coasts. I recently spent two months in California, where I grew up, and it was a real downer to talk with folks suffering from plunging housing values, decaying roads and the state’s massive multi-billion budget deficit. Now I am back at my Florida home, surrounded by similar problems. Suffice to say, the folks in California and Florida are depressed because the real estate in these regions is obviously overpriced. Treasury Secretary Paulson recently stated that we have to fix the housing problem before we can fix the overall U.S. economy, and a truer statement hasn’t been spoken.

Thanks to booming exports, U.S. economic growth was strong in the second quarter. Third quarter growth should also be better than expected. A recent economic shocker happened when the Commerce Department recently revised the second quarter GDP growth higher to a 3.3% annual pace up from its initial flash estimate of 1.9%. Wow! Economists had expected the second quarter GDP to be revised up to 2.7%, so this was truly a major surprise. This big upward revision in the second quarter GDP was due predominately to soaring exports and tighter inventories. Exports rose 13.2% in the second quarter and were revised from the initial flash estimate 9.2%.

That’s only part of the story, of course. In the second quarter GDP revision, the weak housing market reduced 0.6% from GDP growth, which marks the tenth consecutive quarter in where housing has been a persistent drag on growth. Also in the GDP revision is that business investments shrank at a 2.5% annual pace. Specifically, investments in equipment and software fell 3.2%, while investments in structures increased 2.2%. Overall, business investments cut 0.4% from second quarter GDP growth. Businesses are clearly stressed, since in the second quarter, corporate profits before taxes decreased $37.8 billion or 2.4% at a quarterly rate, to $1.56 trillion. This was the fourth straight quarter of declining before-tax profits. In the past year, profits were down 7%, which represents the weakest year-over-year growth since the third quarter of 2001.

Believe it or not, the second quarter GDP has likely one more upward revision brewing to a big productivity surge in the second quarter. Specifically, the Labor Department recently reported that productivity rose at a 4.3% annual rate in the second quarter, up from its earlier estimate of 2.2%. The big productivity booster was that unit labor costs actually declined 0.5% in the second quarter, compared to the Labor Department’s initial estimate of a 1.3% rise. Ironically, this big jump in productivity should cause the second quarter GDP to be revised significantly higher!

Overall, it’s clear that soaring U.S. exports and consumer spending (from stimulus checks) were responsible for the second quarter GDP growth. Looking forward, it’s believed a recession could be looming now that there are no more stimulus checks. Signs exist the third quarter GDP is off to a good start. A barometer of business spending, namely orders for non-defense capital goods excluding aircraft, increased in July by an even more impressive 2.6%, after going up 1.3% in June. Year over year, this barometer has increased 4.2%, indicating capital spending has not collapsed despite an uncertain economic outlook, tight credit conditions and the soaring commodity prices that have pressured corporate profits. This is encouraging and despite the fact business investments cut 0.4% from second quarter GDP growth. It now appears that business investment will likely make a positive contribution to GDP growth in the third quarter. Despite the likely possibility of slower consumer spending, it appears that economists estimates of 2% GDP growth in the third quarter is now very possible, especially with continued strong export growth.

Despite strong exports, durable goods orders and factory orders, the Fed remains pessimistic. The minutes of the August 5 Federal Open Market Committee (FOMC) meeting were recently released and they were depressing. Specifically, the FOMC minutes revealed that “labor markets had softened further, financial markets remained under considerable stress, and that these factors, in conjunction with still-elevated energy prices and the ongoing housing contraction, would likely weigh on economic growth in coming quarters.” Yikes! The Fed minutes also said that there were even “downside risks” to this gloomy outlook. What seemed to worry the FOMC members the most was the renewed concern among Fed officials about a potential toxic brew of weak growth and weak banks that could cause a downward spiral of growth, or an “adverse feedback loop” in the tortured language of central bankers. Translated from Fedspeak, the members of the FOMC obviously cannot see the light at the end of the tunnel!

So while we haven’t seen an official recession, it doesn’t mean we’ve completely dodged the bullet. But then again, an “official” recession may not feel all that different than what’s going on right now!

Louis Navellier has earned a national reputation as a savvy stock picker and portfolio manager over the past 27 years. He writes four newsletters/trading services for individual investors, Emerging Growth, Blue Chip Growth, Quantum Growth and Global Growth. He informs readers how to invest, delivers the latest in stock market analysis, and is currently writing about whether we’re in an economic recession on his blog.

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