On July 31, the Department of Commerce’s BEA (Bureau of Economic Analysis) released an important set of numbers regarding GDP. Of most immediate interest, the advance estimate of GDP growth for the second quarter, April-June, 2009, was a very moderate -1 per cent per annum. The small magnitude of this negative number confirms an inflection point in the second quarter. As most of us had already thought, the economy is no longer in the free-fall of October 2008 to March 2009 — when the rate of output contraction was approximately 6% per annum – but, rather, is beginning to level out.
Furthermore, the figures reveal large depletion of inventories in the second quarter, which offers good grounds for hope that firms will begin to produce more in the second half of the year. In other words, the economy is probably bottoming out even as we speak.
But even if it turns out that the NBER Business Cycle Dating Committee eventually puts the trough sometime in the 2nd half of 2009, it will not make that decision until all the facts are in, which will be a long time. A major reason is that government statistics, especially for GDP, are always revised subsequently. That brings us to the other big component of the BEA release on Friday: comprehensive revisions to the GDP numbers going back many years. The BEA does a comprehensive revision generally every five years. In this case the statistics were substantially affected, especially those over the last dozen years, as the results of a number of permanent changes in methodology (such as how natural disasters are treated in the accounts).
These revisions produced two interesting implications for the current recession, quite aside from the question whether it is now ending.
First, the recession turns out to have been worse than the previous GDP numbers indicated. During the course of 2008, the economy apparently contracted 1.9%, more than double the previous estimate of 0.8%. The cumulative decline now appears to have been 2.8% (as compared to the previously reported 1.8%). Add in the latest quarter, and the 3% cumulative decline reinforces the claim of this recession to be the worst since the 1930s.
Second, that revision includes a conversion of the +0.9% that was previously reported for the first quarter of 2008 to the new estimate for that quarter: -0.7%.
That is important from the viewpoint of the NBER Business Cycle Dating Committee. Why? All through 2008 it was difficult to tell whether a recession had started at the end of 2007. Some measures such as employment and real income peaked, but on the other hand it appeared that GDP had continued to grow in early 2008. Even after the accelerated deterioration in the autumn of 2008, when it could no longer be doubted that the economy was in recession, the signals as to the date of its beginning still conflicted.
The Committee ended up, on December 1, 2008, declaring that the peak had occurred in December 2007. As always, there were critics. Some didn’t see how we could declare that a recession had begun six months before GDP growth turned negative. “Everybody knows that a recession is defined as two consecutive negative quarters” (More common, as usual, was the precisely opposite critique: “The NBER is just now saying what has long been obvious to everyone but them.”)
The new report from the BEA that the first quarter of 2008 was negative after all is thus another piece of evidence that validates the choice of end-2007 as the business cycle peak. Similarly, it validates the decision by the Committee to have made the call in December, rather than waiting for the BEA revisions of July 31, 2009.
The bottom line of all of this? We are less at sea than we had feared. The data now tell a story that is fairly well delineated, the story of a recession that, though upsettingly severe in amplitude, appears familiarly sinusoidal in shape.