Comments on: White House Confidence that US is Not in Recession is Misplaced http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/ Views on the Economy and the World Mon, 06 Oct 2008 18:08:53 +0000 http://wordpress.org/?v=2.5.1 By: Andy http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1025 Andy Wed, 14 May 2008 11:06:59 +0000 http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1025 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. 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.

]]> By: jfrankel http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1021 jfrankel Wed, 14 May 2008 01:44:12 +0000 http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1021 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. 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.

]]> By: Andy http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1020 Andy Wed, 14 May 2008 00:55:50 +0000 http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1020 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. 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.

]]> By: Assorted Links « Mostly Economics http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1010 Assorted Links « Mostly Economics Tue, 13 May 2008 04:22:38 +0000 http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/05/12/white-house-confidence-that-us-is-not-in-recession-is-misplaced/#comment-1010 [...] Jeff Frankel on [...] [...] Jeff Frankel on [...]

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