January 30, 2008
Weak GDP report
The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 0.6% annual rate in the fourth quarter of 2007, a weaker report than many of us had been expecting.
Consumption spending grew at a 2.0% annual rate during the fourth quarter, significantly weaker than the 3.2% growth that would have been expected based on the personal consumption data that we had available for October and November, and confirming the impression from retail sales data that consumption spending dropped sharply in December. The other big surprise was a big drop in inventories. That means that production growth was not as strong as sales, and hence, reduces the estimate of GDP, though it may leave businesses in a little better position to weather any further drops in demand. Without the inventory correction, real final sales grew at a 1.8% annual rate in the fourth quarter, somewhat less alarming than the headline GDP numbers alone.
Exports, which had made a very strong contribution to 2007:Q3, continued to grow in the fourth quarter, albeit at a slower pace. Housing made an even bigger negative contribution than it has for each quarter over the last two years. Business investment also kept us afloat-- had nonresidential fixed investment been flat, the quarter's GDP growth would have come out negative.
With the 2007:Q4 GDP numbers, I have updated our GDP-based recession probability index, which currently reads 7.7% for the third quarter of 2007. This index is not a prediction of what may come next, but rather is an assessment of overall economic performance as of the third quarter of last year. In this respect it is like the declarations from the National Bureau of Economic Research, which announces its conclusion about the dates when recessions begin and end. Like the NBER, I wait until there is enough data to make a definitive declaration, and will therefore wait until further data revisions and the advance 2008:Q1 GDP figures are released before making a declaration as to whether a recession may have started in 2007:Q4. What we can say categorically now (largely on the basis of the 4.9% GDP growth of 2007:Q3) is that the slow economic growth through the first three quarters of 2007 would not be characterized as an economic recession.
Posted by James Hamilton at January 30, 2008 10:49 AMdigg this | reddit
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» January 30, 2008 from PrefBlog
OK, OK, OK. Let’s get this over with. The Fed cut 50bp to 3.00% and the yield curve steepened. In news that I have not yet become completely fed up with, Fitch has cut the rating of FGIC, a monoline insurer: Financial Guaranty, a unit of New York... [Read More]
Tracked on January 30, 2008 06:27 PM
On a forward-looking basis, I rate the probability of recession at 90%.
The only way recession can be avoided is either :
a) An immediate drop in Oil prices down to $70
b) An event like the Netscape (1995) or Google (2004) IPOs.
Unless one of these happens now, we are in a recession, in fact it has already begun.
The good news is that the FF rate is already 3.25%, which means that we could have recovery within 2008 itself.
Posted by: GK at January 30, 2008 11:07 AM
Correction, make that 3.00% for the FF rate.
Posted by: GK at January 30, 2008 11:36 AM
For the USA a period of decreasing growth rate of real GDP has started around 2001. The current slowdown is temporary only and will be observed the next 9 to 10 months - then a strong recovery to a rate of 5% per year, also short in time.
Modeling Real GDP Per Capita in the USA: Cointegration Test
A two-component model for the evolution of real GDP per capita in the USA is presented and tested. The first component of the GDP growth rate represents an economic trend and is inversely proportional to the attained level of real GDP per capita itself, with the nominator being constant through time. The second component is responsible for fluctuations around the economic trend and is defined as a half of the growth rate of the number of 9-year-olds. This nonlinear relationship between the growth rate of real GDP per capita and the number of 9-year-olds in the USA is tested for cointegration. For linearization of the problem, a predicted population time series is calculated using the original relationship. Both single year of age population time series, the measured and predicted one, are shown to be integrated of order 1 - the original series have unit roots and their first differences have no unit root. The Engel-Granger approach is applied to the difference of the measured and predicted time series and to the residuals or corresponding linear regression. Both tests show the existence of a cointegrating relation. The Johansen test results in the cointegrating rank 1. Since a cointegrating relation between the measured and predicted number of 9-year-olds does exist, the VAR, VECM, and linear regression are used in estimation of the goodness of fit and root mean-square errors, RMSE. The highest R2=0.95 and the best RMSE is obtained in the VAR representation. The VECM provides consistent, statistically reliable, and significant estimates of the coefficient in the cointegrating relation. Econometrically, the tests for cointegration show that the deviations of real economic growth in the USA from the economic trend, as defined by the constant annual increment of real per capita GDP, are driven by the change in the number of 9-year-olds.
Keywords: GDP per capita, population estimates, cointegration, VAR, VECM, USA
JEL Classifications: E32, E37, C53, O42, O51
Posted by: kio at January 30, 2008 11:44 AM
I look forward to seeing the December PCE and DPI detail tomorrow.
Recurrent rant: in the face of record-high home vacancies and record declines in home prices, the Q4 07 GDP contribution from 'housing services' was positive (housing services contributed 0.36% to the GDP growth figure of 0.6%).
That is terrible, BEA; get another metric. 'Owners equivalent rent' makes no sense as you currently construct it.
Posted by: jg at January 30, 2008 12:12 PM
I see defense spending actually fell. Now this may not be all that Keynesian - but I'd like to see defense spending continue to fall. Of course, I'd replace part of this with more government investment in things like schools and the road/bridge infrastructure.
Posted by: pgl at January 30, 2008 12:49 PM
"I'd replace part of this with more government investment in things like schools and the road/bridge infrastructure. "
I disagree. The US already spends more on schools than any other country, yet we get poor results. The answer is not more money, but to bust the teacher's unions, and make teachers accountable and their pay merit-based, just like for any other employee in any other sector.
Defense spending is still low as a percentage of GDP relative to the last 50 years. Furthermore, our defense spending helps us in trade. Countries like Israel, Taiwan, South Korea, etc. would not even exist without the US defense budget, but these have been beacons of free-market economics in very inhospitible regions. Taiwan and South Korea, in particular, are what helped us slowly move China towards a free-market trade-based economy.
Posted by: GK at January 30, 2008 12:58 PM
Remember the inventory data goes into the GDP as the change from the end of the quarter to the end of the quarter --Sept to Dec. But we do not have any December data yet. I suspect because November final sales were stronger then expected and December sales were weaker then expected --a surprising part of Xmas sales were in November --that when we get the December data the inventory change for the 4th Q will be revised higher.
Posted by: spencer at January 30, 2008 12:59 PM
Admire the detail you bring to the discussion spencer, but GK's somewhat less. Imagine a 2nd IPO even of the size of Google making a difference large enough to save our butts from the dreaded Recession. Izit my weak imagination or am I hopelessly lost with that clutter of House For Sale signs?
I think I almost live for James' bar graph breakdown of the GDP. Seriously if I were to be interviewed by the Consumer Confidence people, it would make a pile of difference to have some quality time with this visual...just sayin I'm way more settled, prepared, focussed and of course confident now that a pile of the anxiety has been removed. [Sorta like hearing the rustlin in the bushes and letting your imagination lose some of your composure...until you see that indeed it was the sound of a bear...and although headed your way it is only a bear cub. And you and your stick are ready for that!]
So the (warm, cuddly, no matter how icy) take home for me: inventory build -> GDP final revision up (that was a 2% diff to GDP growth); the overall trend of consumption following the housing peak down the hill; (I'm busy accounting for 07Q2, the outlier.) Imports, masking lofty $90/barrel oil and falling demand for housing related materials? (Seriously, shouldn't oil be making more of an impact?)/ Non-residential investment about ready to follow res as per CR,
So the final could be revised up, but the outlook for the next quarters look grim.
Posted by: calmo at January 30, 2008 02:28 PM
"Imagine a 2nd IPO even of the size of Google making a difference large enough to save our butts from the dreaded Recession. "
It has happened twice before - where a weak economy became much stronger immediately after such an IPO. Netscape in 1995 and Google in 2004.
It is not simply because of the value of the newly public company. It is because it causes a chain reaction/virtuous cycle of stock market, consumer confidence, and productivity gains for the next 3-4 years. The impact is mostly psychological, but it does cause a ripple effect. Look at the number of Tech IPOs in the 36 months after Google, vs. in the 36 months before it. Same with Netscape in 1995. These are the watershed events that start a new 3-4 year technology cycle.
Posted by: GK at January 30, 2008 03:59 PM
Let's see if I get this right.
Inventories are down. Implication:
(1) Replenishing/maintaining inventories will contribute to current quarter economic activity; Plus for current quarter.
(2) Companies are predicting lower demand for current quarter, hence lower inventories sufficient; Negative for current quarter.
The above analysis assumes #1 (which is a fine assumption, not questioning it), but it could be #2? Or some #2?
In other words, is the economic glass half-full or half-empty. (Or should I saw is the economic warehouse half-full or half-empty.)
Just wondering how to interpret. I could be confused.
Posted by: General Specific at January 30, 2008 04:18 PM
pgl says: "I'd replace part of this with more government investment in things like schools and the road/bridge infrastructure."
You left out universal health care.
Sure why not? The government has such a strong track record in return on the dollar in these areas.
The government cannot build a fence on the border and you want them to be in the business of building infrastructure.
The fiscal malfeasance would be off the charts.
This would be the "Big Dig" multiplied; no thank you.
Posted by: babinich at January 31, 2008 02:54 AM
"Sure why not? The government has such a strong track record in return on the dollar in these areas."
It would be nice to see actual statistics on claims like this. I prefer private sector over public, but there are a lot of bridges that are standing and a lot of Enrons that have fallen down. In other words, not everything the government does turns to dust.
Posted by: General Specific at January 31, 2008 07:29 AM
More evidence that the recession began in October 2007: revised figures for real personal consumption expenditures turned south in October. See table 7:
All we need are revised establishment employment figures (coming in four months) to get rid of the inane October 2007 birth/death adjustment of 103K (the household survey of total employment turned south in October 2007).
Those two, along with industrial production having fallen 0.7% in October and real disposable personal income having fallen in October, too, and I think we can be 'official' on the recession start date as October 2007.
Posted by: jg at January 31, 2008 08:52 AM
You need to consider the possibility of pure spurious correleation, or that something afoot in the economy created circumstances that were favorable for IPOs and also for growth. The notion that a tiny financial event, relative to the overall size of the economy, could have such large real-side implications is far fetched. There is a tendency among market participants to make too much of the real-side influence of financial market prices and events. Currency traders obsess about currencies. Bond traders think bond market prices, exclusive of all else, contain vastly more information than they often do. Gold bigs may be the worst of all.
Posted by: kharris at January 31, 2008 10:33 AM
Just one note from Italy.
I would suggest to deflate the Nominal GDP +3.2% figures using the Domestic Purchases Price Index +3.8% (as published by the BEA), because it better captures the effect of import prices on the overall price level of the economy.
We have to remember that oil prices and the falling US dollar had an important impact on the overall price level.
In this way, you obtain a 4Q07 Real GDP of -0.6%.
Posted by: Gabriele G. at January 31, 2008 01:46 PM
The Van Schaik interest rate based business cycle indicator is about to turn positive- a reasonably sure sign the recession has already started. Of course, it is an indicator designed to give advance warning of a recession and it turned negative in April 2005. We still think the recession started in October or November of 2007, a longer lead time than average, and we expect it to last up to 25 months. Lower interest rates will alleviate some of the pain but not until they have had time to work through the economy. Tax rebate checks will only help if they are spent on the right goods and services. Sending more dollars overseas to import more trinkets will be of little benefit.
Posted by: Peter Van Schaik at January 31, 2008 05:06 PM
In the previous post I had an error in my URL. It's http://jpetervanschaik.googlepages.com
Posted by: Peter Van Schaik at January 31, 2008 05:12 PM
James, I have commented on this before but  when the indicator reaches 25% on the chart, a recession has followed more than 50% of the time, and  when the indicator reaches 50% on the chart, a recession has followed on 7 out of 8 occasions. I think the indicator is very valuable but I think the scale seriously understates the likelihood of recession.
Posted by: Mike Howard at January 31, 2008 07:39 PM
Unless we've escaped the business cycle along with every other global trading partner, recessions are never "avoided" - they are only deferred.
Let's suck it up and get it over with.
BTW, Microsoft's huge offer to buy Yahoo will mean lots of flash money here in Silicon Valley.
Guess I can't expect any sudden drop in housing prices in my neighborhood for a while.
Posted by: Joseph Somsel at February 2, 2008 11:19 AM