July 31, 2008
Not quite 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.
Posted by James Hamilton at July 31, 2008 08:22 AMdigg this | reddit
Is the improvement in trade due primarily to the weak dollar or to shifts in relative growth rates?
I tend to come down more for shifts in relative growth rather than the weak dollar. But that is just a feeling that I have not tried to quantify or test.
Posted by: spencer at July 31, 2008 09:43 AM
Good post. Another "popular" definition of a recession is 4 months in a row of job losses. Also, some would argue that we have not had recessions before without also having significant underperformance in the prices of both commodities and small cap stocks.
However, these are not quite the variables that the NBER looks at when determining whether a recession has occurred.
Posted by: Charlie Stromeyer Jr at July 31, 2008 09:58 AM
I have a certain sympathy with Spencer's views, but I can see significant tensions building as Europe takes the brunt of the dollar depreciation, whereas Asia is pegged either explicitly (China) or implicitly (Japan). I don't think Europe will be able to do all of the heavy lifting by itself.
Posted by: don at July 31, 2008 10:19 AM
Spencer: "Is the improvement in trade due primarily to the weak dollar or to shifts in relative growth rates?"
I'm interested in what data people think would be sufficient to practically answer that question. Concretely, did customers in other countries buy more aviation equipment, diesel engines, generators, and earth movers because they became cheaper in local currency or because their economy had grown? Both. But what was the relative contribution of those factors? To my mind, the question is too hard because any sort of simple model won't account for the effects of social diffusion of technologies.
When I visited India in 2001 I was struck by the large number of commercial construction sites where I noticed that earth was being moved by large crews of people carrying dirt balanced on their heads in vessels that about the size/shape of a large wok. Using wheelbarrows would have been a major efficiency improvement at these sites. I don't believe that the absence of wheelbarrows was primarily due to capital constraints, so I suppose it was due to the weakness of a wheelbarrow-using tradition compared to dirt-balanced-on-head tradition. Point being that when people see their peers buying planes, generators, and earth movers then they are more likely to buy them as well. So there is another type of factor which is "neither" in terms of the question above. And therefore, overall it is too hard to answer.
Posted by: Josh Stern at July 31, 2008 10:19 AM
I disagree. I think that :
A US Recession started in December 2007. If Q407 GDP was revised down, Q108 also will be.
I also think that the recesson will end by October 2008. Thus, it was a 10-month recession, and is almost over.
Posted by: GK at July 31, 2008 11:02 AM
"When I visited India in 2001 I was struck by the large number of commercial construction sites where I noticed that earth was being moved by large crews of people carrying dirt balanced on their heads in vessels that about the size/shape of a large wok. "
Indeed. In fact, a wheelbarrow would help the female laborers even more (many of which are also carrying the dirt wok).
Indian culture is not one where the concept of productivity improvement comes naturally, however.
Posted by: GK at July 31, 2008 11:04 AM
I've noted that you've often taken hits for your recession index, people complaining that it comes too late, and that by the time it says we were in a recession six months ago, everyone would know it. But now its value is becoming clear, with a great deal of uncertainty about when or whether a recession has started or will start. Are we in a recession? Were we? People disagree on all this. Having an objective measure that is consistent with previous calls but is not influenced by political pressure can help to bring some much-needed clarity to the issue.
Posted by: Hal at July 31, 2008 11:22 AM
Jim, the way GDP is calculated is deeply flawed. Or can you really with a straight face argue that inflation was just 1.1% during the second quarter? Because that is the inflation number needed to come up with a real growth rate of 1.9%, given the nominal growth rate of 3.0%.
For reasons that I discussed in detail here it makes a lot more sense to deflate nominal growth with the gross domestic purchases index, than the gross domestic product index. Using this approach, real growth was negative during the last 3 quarters.
Posted by: Stefan Karlsson at July 31, 2008 12:19 PM
I'd also be very interested in hearing how inflation grew at just 1.1% annually last quarter. That really, really, really sounds off, doesn't it?
Posted by: Jim D at July 31, 2008 12:27 PM
Are we jumping to fast to the conclusion that things are not that bad?
Posted by: Esteban at July 31, 2008 12:38 PM
in any case, from a global perspective, the crater of real imports has a quite strong negative implication for the international macroeconomic cycle; specifically, it points to a deceleration of US exports to the rest of the world during the second half of 2008. So a stronger dollar might be a net positive for all the people around the world.
Posted by: ISM at July 31, 2008 12:48 PM
Stefan, today Harvard University Professor Martin Feldstein who also works for the NBER said that we may be in the middle of a very long recession:
Also, former Federal Reserve Chairman Alan Greenspan said today on CNBC that there is better than a 50/50 chance that we are in a recession, however, I don't listen to Greenspan because he was a serial asset and credit bubble inflator.
I will now try to review your arguments in depth to see if I agree with you.
Disclosure: I have various ties to Harvard University so I might be biased in favor of what Marty Feldstein has to say.
Posted by: Charlie Stromeyer Jr at July 31, 2008 02:02 PM
"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."
Well JDH, congratulations that your view from the ivory tower looks so good. I'd also be interested in your views on the bull market in equities that you may also be viewing.
I mentioned some months ago that John Hussman, a former econ professor (now at hussmanfunds.com), has a 4 point test that has not failed in over 40 years. He said in January, 2008, that the recession started in November or December, 2007. When NBER adjusts their 1Q & 2Q numbers down in a few months, get ready for a change in view from your tower. Meanwhile, enjoy your view.
Posted by: Mike Laird at July 31, 2008 02:12 PM
Are we jumping to fast to the conclusion that things are not that bad?
Nah. According to Google News a few minutes ago pretty much
everything is "the worst since the Great Depression".
Posted by: Jim Glass at July 31, 2008 05:06 PM
Stephan, you might be correct about the gross domestic purchases index, but why are you opposed to supply side economics? Is it mainly because economic inequality here in America is now the worst since the Gilded Age:
However, this new paper shows that countercyclical supply side fiscal policy may be effective:
Also, Mike Laird, we are in one hell of a credit crisis so I'm not sure if Hussman's 4 point test will apply correctly this time but perhaps it will.
Posted by: Charlie Stromeyer Jr at July 31, 2008 05:19 PM
Not really a recession?
I've got some swamp land you might be interested in. There's a bridge in Brooklyn I could give you a good deal on...
The infinite capacity of people to fool themselves never ceases to impress me...
Love it! Do you guys actually accept these nonsense figures, even provisionally, before they revise them down later?
Posted by: Dave Cohen at July 31, 2008 07:35 PM
It is refreshing to hear from an economist willing to call a spade a spade.
I suppose that an economist in Sweden is under less pressure to defend sacred cows and manipulated statistics than his brethren in America.
Excluding import pricing in GDP calculation has contributed to America's deterioration from the greatest creditor to greatest debtor nation in approximately 30 years! Ignoring import pricing obviates the use of GDP as a measure of national income or expenditure.
As I recall, I read several articles last summer explaining that US GDP has been inflated since 2001, when the exponential rise in (imported) oil prices began.
Posted by: MarkS at July 31, 2008 08:19 PM
interesting article by the NYT about GDP figures:
Posted by: ISM at August 1, 2008 02:30 AM
Can somebody explain the pattern of the GDP deflator. Here are the figures for the last 8 quarters:
2.7 2.2 4.2 2.0 1.5 2.5 2.6 1.1
What explains the large drop in III 07 and II 08?
Posted by: Carlomagno at August 1, 2008 04:05 AM
Carlomagno, I believe the large drop in Q2 08 is due to the rise in import prices, but right now I can't remember what was the case back in Q3 07.
Also, please note that a major problem with the GDP deflator is that it does not include any products or services for intermediate use:
You can see in this brief BusinessWeek piece that GDP = gross domestic purchases + net exports.
Posted by: Charlie Stromeyer Jr at August 1, 2008 05:23 AM
Thanks. But how can the effect of rising import prices be a boost in GDP via a lower deflator? Surely rising import prices would subtract from net exports and thus from GDP?
Posted by: Carlomagno at August 1, 2008 06:06 AM
I think a better definition of recession would be a period where the standard of living falls. If GDP growth is the result of increased exports where we send what we are producing overseas for others to consume, we do not increase our living standard (we would increase our financial wealth but that is a different subject). Or GDP growth could be the result of an increase in the population where more people are producing goods and services. In both cases individual consumption would not be increasing, or in other words living standards would not be getting better. So GDP growth may be positive, but if living standards are falling I call it a recession (and based on the mood of the country I think many would agree with me).
Posted by: markg at August 1, 2008 06:30 AM
Carlomagno, what I said is just a "belief", and to answer your question I would first need to see some hard data on the relationship between the GDP deflator and import prices. Does anyone know where to find such data?
Also, I saw one report which said that gross domestic purchases declined .5% in Q2 08, but another report which said there was a 1% decline. (Note that this is different from the correct estimate that Stefan gives for the gross domestic purchases price index).
Posted by: Charlie Stromeyer Jr at August 1, 2008 07:02 AM
Did some googling:
"Apart from consumer prices, another important factor which affects the GDP deflator is the
terms of trade, which is the ratio of the price of exports to that of imports. Since it is only
the net exports of goods and services (i.e. exports deducting imports) that enters into the final GDP figure, the prices of exports and imports have offsetting effects on the GDP deflator � the price of exports has a positive relationship while that of imports a negative relationship with the GDP deflator. Thus, the movements of the GDP deflator are affected by the relative movements of import and export prices."
I find this most counterintuitive.
Posted by: Carlomagno at August 1, 2008 08:03 AM
I heard inflation hawk, former Fed gov. Bill Poole on Bloomberg this a.m. He said that exports are four times as large a percentage of GDP as housing yet they only get one quarter of the attention. I thought this was an interesting perspective, but I also wonder how narrow his definition of housing is and whether expanding it changes the story a lot. For example, he probably doesn't include the furniture industry or the drywall industry in "housing", but dry wall and furniture sales must be strongly influenced by home sales and home construction. On the other hand, there must be a lot of industries that are strongly influenced by export sales but not included in exports.
Posted by: Josh Stern at August 1, 2008 08:17 AM
0.6 percentage points on housing, not 0.6%. This is the kind of stuff that drives me nuts.
Posted by: Dave at August 1, 2008 08:52 AM
Dave, so your problem is that you think "subtracting 0.6% from the annual growth rate" is most naturally interpreted as 2 - 0.006*2 rather than 2 - 0.6? But calculating a percent of a percent is almost never the correct thing to do, and asserting that to be the default meaning of the expression 0.6% strikes me as a bizarre convention.
Posted by: JDH at August 1, 2008 09:57 AM
Josh Stern, he probably has a fairly narrow definition of housing because the Joint Housing Center studies at Harvard University once said that housing comprises 23% of the economy (including furniture sells etc.)
Posted by: Charlie Stromeyer Jr at August 1, 2008 11:35 AM
I don't listen to Greenspan because he was a serial asset and credit bubble inflator.
That he was, no argument there. But a guy like Greenspan seeks to please the crowd and maintain his reputation. He does have his ear to the ground.
Posted by: GNP at August 2, 2008 07:57 PM
"Without that negative contribution from inventories, real final sales grew at a robust 3.8% annual rate."
But then, we had positive contribution from inventories in the first quarter. If we deduct this from Q1 growth, together with -0.2% 2007Q4 growth, we already experienced two consecutive quarters of negative growth!!
Posted by: Ekonomix at August 5, 2008 09:36 AM