White House CEA Chairman Ed Lazear expressed confidence to the Wall Street Journal today that the country is not in recession. I, like Menzie Chinn, am surprised that Lazear is willing to put his reputation on the line in this way.
It is true that the Commerce Department BEA’s advanced estimate of first-quarter GDP growth was still above zero (+0.6%). But there are three reasons not to take this number too seriously.
(1) Revisions in these numbers are usually substantial, so the final number could easily turn out to be negative — or twice as high.
(2) Even if the +0.6% number were to hold up, it can be entirely accounted for by measured inventory investment. In other words, real final demand fell rather than rose in the first quarter. It is plain that this inventory accumulation was not the outcome of deliberate decisions by bullish firms to add to their inventories in anticipation of a booming economy. Rather it was almost certainly unintended inventory accumulation, as goods sat unsold on store shelves and in warehouses. This overhang makes it more likely that inventory accumulation will be negative in the 2nd quarter. (Admittedly, rising exports from the weak dollar and rising consumption from the tax rebate checks could outweigh that particular factor, and we could scrape along the ground for another quarter at near-zero growth).
(3) As Martin Feldstein has been pointing out (e.g., in the FT), it is a misinterpretation of the GDP statistics to say that growth remained positive in the first quarter. Rather GDP for QI as a whole was estimated to have been 0.6% higher as compared to QIV as a whole. The Commerce Department does not report monthly GDP estimates, but MacroAdvisers does, and these data suggest that monthly GDP has been declining since January.
There are other reasons as well to consider it likely that a recession may have started as early as January. The NBER Business Cycle Dating Committee, which declares when recessions start, looks at lots of data. But the most important information, alongside GDP, is the jobs data from the Bureau of Labor Statistics. Employment, like GDP, offers a comprehensive measure across the economy, but it has the advantage of being available monthly and with shorter lags. The employment data suggest that the recession may have started in January.
It is certainly possible that it will turn out, in the end, that the economy escaped recession in the first quarter. Even if that is the case, however, it is difficult to be optimistic about the rest of the year. I can’t remember a time when there have been so many worrisome danger signals: depressed household balance sheets, mortgage defaults, high oil prices, low consumer confidence, … . The odds of a recession sometime this year must be rated high.
Fed Chairman Bernanke and Treasury Secretary Paulson have wisely reined in the “happy talk” with which the initial sub-prime mortgage crisis was greeted last year. (Remember “the crisis looks contained”?) If I were Ed Lazear, I would follow their lead.
[...] Jeff Frankel on [...]
2 things:
* The current “tracking” number of Q1 GDP growth is now over 1 percent — looks like it will be revised up.
* The stimulus is such that it will be almost impossible for GDP to contract in Q2 and Q3. Suppose that consumers spend $20 billion of the stimulus checks in each quarter for a total of only 40% of the stimulus. Annual GDP is about $14 trillion so quarterly GDP is about $3.5T. The stimulus adds 20/3500 = 0.57 percent to growth in the quarter which works out at 2.3 percent at an annualized rate — even if the rest of the economy is contracting at a 1 percent annualized rate, the growth rate would still be solidly positive.
I doubt the NBER would declare a recession based on three quarters of 1+ percent growth, even if unemployment is rising.
Reply to Andy:
You make some good points.
Yes, I had heard that QI is more likely to be revised up than down.
But on your other point, I would not rule out the possibility that the rest of the economy could contract at worse than a 1 percent annual rate in the 2nd and 3rd quarters. Nor would I rule out the economy continuing to run essentially flat, as it has been, through the 3rd quarter, and then going into negative GDP growth thereafter. I don’t think the government would be able to repeat the fiscal stimulus enacted earlier this year, because the budget deficit will already be rising at an alarming rate by the end of the year.
Here is an interesting teaser. Imagine that there is never a negative quarter, but there are two consecutive quarters in which overall growth is (barely) positive on a quarter-over-quarter basis, consisting of four or even five negative quarters, followed by a final strong positive number at the end of the second quarter (perhaps including more pile-up of inventories) that brings the average back above zero. If unemployment and other indicators were very bad at the same time, would the NBER call it a 4-month recession? I am not completely sure of the answer, even though I am one of the seven members on the NBER Business Cycle Dating Committee. Our definition doesn’t absolutely rule it out: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP…” Still, I agree, it seems rather unlikely. But then any such precise scenario has low probability to being with.
The truth is that I have no idea what is going to happen. It’s all guesses. All I can say, based on past experience, is that this period will probably look quite different (in one direction or the other) than our best guesses say now. That is why the NBER BCDC waits until almost all is “said and done”, before making the call.
That’s a very plausible scenario — growth between 0 and 1 percent from Q407-Q308 and likely not a strong rebound after that. I actually see that as the most likely scenario, as opposed to an old-fashioned recession driven by inventories and manufacturing cutabacks.
Two more favors working against a drop in GDP:
* Corporate balance sheets are in great shape. They didn’t get as fat as in the late 90’s so have less to cut. This is why we haven’t seen a greater rise in unemployment, I think.
* Since we are worried about a consumer-driven slowdown, the current account deficit actually works in our favor this time. Every toy from China not bought counts as a reduction in C but then will later show up as a drop in M as well, canceling each other out.