Crunching the Numbers: It's Not a Recession

The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 1.9% annual rate in the second quarter of 2008, less than many analysts had been predicting a week ago, but substantially better than the 6-month-ahead predictions for that number that we were hearing back in January.

Today's report contained some good news. The main reason that the final GDP number was weaker than predicted was the big drawdown in inventories. Without that negative contribution from inventories, real final sales grew at a robust 3.8% annual rate. Housing subtracted 0.6% from the annual real GDP growth rate, though that's actually the smallest negative contribution we've seen in a year. Remember that new home construction has to be worse (on a seasonally adjusted basis) than it was the previous quarter in order to make a negative contribution to the GDP growth rate. Bigger exports and smaller imports each boosted the GDP growth rate by over 1%. Complain as you like about the Fed permitting such a big slide in the dollar, but at least it's having the intended effect on aggregate demand through the international channel. Without the gains on net exports, real GDP would have actually fallen, making one worry about recent indications of a global economic slowdown. Real personal consumption spending also grew, though less than I had been expecting, given the presumed stimulus from the tax rebate.

 

 

The BEA also released its annual revision of earlier GDP numbers. Most noteworthy here is the adjustment to 2007:Q4 growth, which was initially reported at +0.6%, and has been revised down to -0.2%. One rule of thumb sometimes used is that two quarters of falling real GDP is characterized as a recession, according to which the -0.2% for 2007:Q4 and anemic +0.9% for 2008:Q1 do not quite qualify. I have developed an algorithm (described here and in more detail here) that looks at the full history of GDP data to refine that rule a little, based on a simple pattern-recognition procedure. Given the revisions in the data (and the great usefulness of having more than one quarter's data to identify the most recent trend), I only use this to make a call as to where the economy was in the previous quarter. With the latest release of the 2008:Q2 GDP numbers, I've now calculated our recession indicator index for 2008:Q1, which turns out to be 38.4%. Based on a historical analysis of the algorithm, I would not declare a recession to have begun unless the indicator rises above 66%. So my current assessment is that a U.S. recession had not yet started as of 2008:Q1.

 The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.

Comments

[otbricki:]

Two quarters of negative GDP growth is a very simplistic definition, one that almost no economist buys into.

2008 Jul 31 03:28 PM

[Shinjimas:]

James,
You obviously did not get the memo that you are supposed to withhold all positive information on the economy until after the election. How can we slow this economy down if stories like yours leak out? And we're running out of time....

2008 Jul 31 03:49 PM

[debtacid:]

And the best news of all?

"S&P/Case-Schiller... May home prices fell at steepest rate ever."

Soon I will be able to afford a house without having to compete with janitors with $750,000 of Monopoly money they got from the Fed.

2008 Jul 31 04:53 PM

[StupidityAn...:]

I spotted the fact that the financial big boys were lying through their teeth 3 months ago when they claimed the worst was over. The government is no different than a CEO desperately trying to salvage the companies stock price by bolstering sentiment. They have been spinning the whole economic/financial downturn from day one. In fact, the government has been misleading the public on virtually every front since Bush got elected so why would you give recent economic "reports" any credibility whatsoever?

2008 Jul 31 04:58 PM

[whidbey:]

It appears that you are harmless enough, if not exactly insightful. The "recession" , excuse me, is unfolding slowly into a low, dirty and lengthy trap in which many are unemployed and others just not fully employed. The fix will be the presses - again. The inflation will be hellish to behold. After the collapse of the banking system (FASB gave the banks 15 months more to come clean), we will see a misery index that will exceed the last great experiment. I am not sure of this, but I am more sure of it than of yours. Get serious.

2008 Jul 31 05:33 PM

[L Moore:]

The recession will officially begin on Jan 20, 2009 at 12:00.01

2008 Jul 31 06:50 PM

[Gross Bill:]

Yes, please spare George Bush this recession call as his list of failures has used up both sides of a page.

Let's blame it on all on Obama--even if he hasn't been elected yet.

2008 Jul 31 07:07 PM

[tommytwotimes:]

I agree, everyone keeps calling a bottom but I don't see anyone landing on their feet. More like upside down along with their mortgages.

2008 Jul 31 08:20 PM

[Jason Rines...:]

Hey Bill, you sure didn't mind President Bush recently signing off on giving Paulson unlimted ability for the taxpayers to foot the tab for your shoddy business practice in your sector did you? Housing is a Democrat scam. Lack of oversight on multinationals offshoring is a Republican failure, along with not popping the housing bubble quickly. President gave the Dems everything they wanted but Dems will wait until after election on energy. The lesson President Bush has not doubt learned is that there two parts of the famous Reagan term 'trust but verify'.

2008 Aug 01 11:40 AM