May 07, 2008
Lazear Sees No Recession for U.S. Economy
From WSJ, Henry Pulizzi and John D. McKinnon write:
"The data are pretty clear that we are not in a recession," Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires.
"I would be very surprised if the NBER, looking back at this period, would date this as a recession," Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. "The optimists seem to have been closer to right on that than the pessimists," he said.
Mr. Lazear's remarks follow optimistic comments on the economy by other administration officials this week. Treasury Secretary Henry Paulson, who has spearheaded the White House's response to the credit crunch in financial markets, said Tuesday that "the worst is likely to be behind us."
I must confess that I am amazed that Lazear can be so confident, given that we know that GDP is revised multiple times (see this post). In addition, we know that there are four series that the NBER places primary emphasis on, aside from GDP. (As noted previously, the President seems to be similary confident, despite the trajectory of these four key series).
Nonetheless, remaining focused on the national accounts does not necessarily make the case unambiguously stronger in Lazear's favor. Consider growth rates of final sales to domestic purchasers and final sales of domestic product, compared to GDP.
Figure 1: Quarter on quarter growth rates of real GDP (blue), real final sales to domestic purchasers (red), and real final sales of domestic product (green), SAAR Ch.2000$. Growth rates calculated as log differences. NBER-defined recession shaded gray. Source: BEA NIPA release of 30 April 2008, and NBER.
What the real final sales series indicates is that taking out inventory accumulation yields a negative growth rate in Q1. It is of course possible that the observed inventory accumulation was in anticipation of resumed growth in Q2. The alternative interpretation is not so benign; it was that firms overestimated demand in Q1.
The real final sales to domestic purchasers series highlights a separate concern -- namely that GDP growth has been sustained by now-waning external demand. Recall, final sales to domestic purchasers is:
Y - EX + IM - IInv = C + IFix + G
Where Y is GDP, EX is exports, IM is imports, C is consumption, IInv is inventory investment, IFix is business fixed investment plus residential investment, and G is government spending on goods and services.
As the figure clearly illustrates, the contribution to GDP from net exports is now much less pronounced than it was in 2007Q3. This point can also be seen in Jim's post on the release. We'll know a bit more about Q1 net exports when March's trade figures are released this Friday.
So, in this sense, the decoupling hypothesis is no longer academic. Whether US GDP growth remains positive may hinge crucially on whether rest-of-world growth is durable.
Posted by Menzie Chinn at May 7, 2008 09:45 PMdigg this | reddit
otherwise, you get my cousin (Barry Ritholz) who is a lawyer for mutual fund firm
Posted by: Barry Ritholtz at May 8, 2008 04:20 AM
The source of his confidence is obvious: the gov't manipulates the inflation numbers downwards, so that inflation masquerades as growth in the GDP numbers. Since a recession judgement is based entirely on reported gov't statistics, there ya go. If the current environment were evaluated against 1992 criteria, number crunchers would better recognize the deep doo doo we're standing in.
Posted by: TJ Parker at May 8, 2008 04:20 AM
Barry Ritholtz: Apologies. Typo fixed.
Posted by: Menzie Chinn at May 8, 2008 06:56 AM
He means they are doing everything they can to make sure the recession doesn't officially start until Obama takes over. See blame Clinton and Obama.
This guys reputation is shredded just like Mankiw and the rest of them that proselytised for Bush.
Posted by: me at May 8, 2008 08:51 AM
The most critical element to long term growth in our economy is what actions congress takes, the fiscal side drives growth. Right now it does not look very hopeful.
Congress has expanded Fannie Mae's ability to acquire lower value loans with Fannie already seeing a decline in the quality of their paper and the House had just passed legislation to allow Fannie's management to weaken Fannie's holdings even more. Fannie is too big for the government to allow it to fail so that means some very painful decisions if Fannie continues to decline.
Congress is hampering trade agreements, totally uncharacteristic of the Democrat party, restricting international trade see their recent actions against Colombia, perhaps the fastest growing economy in South America. Certainly the House finally passed an agreement but the Senate is sitting on its hands.
Congress is talking of solving the credit crisis by attacking lenders either by reducing the ratest they can charge or even reducing principle amounts (Bernanke).
The possiblity of a huge tax increase in 2010 is increasing all the time and there is no sign that congress will stop it. Not only that but the probable Democratic nominee, Barak Obama, is talking of doubling the capital gains tax. That would put a silver bullet in the heart of business. You want less of something tax it. You want less capital, tax capital.
And then there is the political payoff of the agricultural interests as the US drives world food costs through the roof.
The list could go on and on.
Econometrics can show us the numbers as we go down the tubes, but I am not so sure that is what most of the unemployed will really be interested in.
Posted by: DickF at May 8, 2008 03:17 PM
A recession is a techincal term. To me we are clearly in one. Walking around midtown manhattan, viweing all the empty store fronts, is a clear signal that we are in one.
Posted by: Banker at May 9, 2008 04:37 AM
"we know that there are four series that the NBER places primary emphasis on, aside from GDP."
But you only charted two, aside from GDP. What have the others been doing.
It would be neat to see a longer time span as well.
Posted by: Name at May 10, 2008 03:09 PM
Name: See this post.
Posted by: Menzie Chinn at May 11, 2008 10:56 AM
"A recession is a technical term. To me we are clearly in one. Walking around midtown Manhattan, viewing all the empty store fronts, is a clear signal that we are in one."
The problem with purely anecdotal evidence is that it is, well, anecdotal. When I walk around my little corner of the country and the surrounding areas I see new businesses, new construction and surprisingly lots of new home construction. To me it is a clear signal that we are not in a recession.
Maybe you should look into the definition of recession?
Posted by: macquechoux at May 15, 2008 05:27 AM