The GDP on the Eve of Recession: Then and (Maybe) Now

There's been relief in many circles that GDP in 2008Q1 was revised upward. I too take this as good news, to the extent that the economy seems to be growing more rapidly -- and output more balanced -- than previously thought. Figure 1 depicts the q/q SAAR growth rate, using the May 2008 preliminary release.

Figure 1: Real GDP (Ch.2000$, SAAR), annualized quarter-on-quarter growth rates, from May 2008 release. NBER defined recession highlighted gray. Source: BEA via FRED II, NBER, and author's calculations.

Several commentators have interpreted this upward revision as a sign that we are safe from recession (Seeker Blog. Fundmastery Blog, NewsBusters, Samurai Trader, and Business Law Prof Blog). I particularly like this line from Carpe Diem:

 

Bottom Line: With GDP growth of almost 1% in the first quarter, there is almost 0 probability that the NBER could determine that the U.S. economy was in recession in 2008, at least not during the first quarter.

 

I'd like to remind readers that GDP is a series subject to a lot of revisions (and in any case, NBER looks at a lot of other series). To that end, I depict below what we thought GDP was doing at the end of May 2001 [1], [2].

Figure 2: Real GDP (Ch.2000$, SAAR), annualized quarter-on-quarter growth rates from May 2008 release (blue), from May 2001 release (red), from July 2001 release (green). NBER defined recession highlighted gray. Source: BEA via FRED II, ALFRED, NBER, and author's calculations.

Note that even at the end of July 2001, we still thought 2001Q1 growth was positive, and thought the same of 2001Q2 as well... So I'm more in agreement with Jeff Frankel than with Carpe Diem.

 

The reason why many suspected a QI turning point in the first place is employment, which is virtually as important an indicator to the NBER BCDC as is GDP. Jobs have been lost each month since January. Total hours worked is my personal favorite, because in addition to employment it captures the length of the workweek, which firms tend to cut before they lay off workers.

 

One final remark about the 2008Q1 preliminary release: note that a big boost to GDP came from the switch of the import contribution to growth from -0.44 ppts to 0.46 ppts, as imports declined. Conditional upon all other information about the other spending components in the current quarter, this means growth is higher, mechanically. But decreasing imports can be a harbinger of either expenditure switching or slowing overall economic growth.

Here is another take on where the economy is going -- that is output adjusted by population (total, including armed forces overseas):

Figure 3: Real GDP (Ch.2000$, SAAR) per capita, annualized quarter-on-quarter growth rates, from May 2008 release. NBER defined recession highlighted gray. Source: BEA via FRED II and Census via FRED II, NBER, and author's calculations.

Comments

[mkreisel]

How about analyzing data from ALL recessions since 1950?

A single data point is USELESS in this kind of statistical analysis.

[Whidbey]

Interesting, however you are assuming that the series are reflective of all relevant sectors. There are sectors of the employment pie that are hurting. For example, farm labor is falling for several reasons. Auto and airline workers will show jumps and the decline in financial services has only started. We can not be confident that the decay will stop with just the food and fuel sectors. But I like your work.

[paulibloom]

Go look at bank loan data from the St Louis FED, the monster employment index, and the house employment survey, they all tell a different story. The funny part is you guys think you can really figure it out, when such forecast eludes thousands of smart people. Nice arm chair general talk.