Is The Next Recession Already Here?

by: Vahan Janjigian, CFA

First, they tell us that the economy grew by 0.1 percent. Then, they revise that to a 1.0 percent contraction. Finally, for its third attempt, the Bureau of Economic Analysis (BEA) says the contraction in real GDP during the first quarter was actually 2.9 percent. Now that's one hell of a revision.

In other words, from the first estimate (aka "advance estimate") to the third estimate, the BEA made a total revision of 3.0 percentage points. To put that in perspective, from 1983 to 2010, the average revision from the first to the third estimate was just 0.3 percentage points.

What gives? It is certainly true that we had a severe winter. It was extremely cold in many parts of the country, and there was plenty of snow. Many economists have long been blaming the weather for weak first-quarter results. They said cold temperatures confined people to their homes and prevented them from hitting the stores and spending their cash. Still, can we really blame the weather for a revision of this magnitude? It's not as if the nation's meteorologists revised their weather reports. "Wait a minute. Temperatures were actually colder than we initially thought!" And what about the internet? Did the cold weather really discourage shoppers from clicking a mouse? I doubt it.

Thankfully, the BEA itself did not blame the weather. It simply said that "the increase in personal consumption expenditures was smaller than previously estimated, and the decline in exports was larger than previously estimated." Economists took it upon themselves to blame this on the weather. The BEA, however, wasn't going to explicitly say that.

I'm sure the weather is partly to blame. Still, that's largely irrelevant. The real problem, after all, is that the economic recovery ever since the end of the December 2007 to June 2009 recession (aka the "Great Recession") has been historically anemic. Many economists are optimistic that we are currently in the midst of a rebound. However, I fear that we may be treading on the edge of yet another recession.

Here's why. The decline in real GDP is bad; however, the most troubling aspect in the report is the decline in nominal GDP. In other words, GDP fell during the first quarter, even if we make no adjustment for inflation. That's an extremely unusual result. The last time nominal GDP declined was when we were in the throes of the Great Recession. And prior to that? Well, you would have to go all the way back to the third quarter of 1990 to find a decline in nominal GDP.

I wish I could be more optimistic about the economy's near-term prospects. We will learn more when the BEA releases its advance estimate for second-quarter GDP on July 30. Like most economists, I too am expecting to see growth. I seriously doubt, however, that growth will be strong enough to make up for the first quarter's contraction. In any case, given the BEA's recent track record, I won't be putting much weight on that first estimate. Chances are it will be revised significantly.