Congratulations! Its a Recession!
It doesn't take too much advanced mathematics to note that by several historical methods for determining whether the economy is contracting or expanding, we are now in a recession.
Consider a true inflation measure of GDP, per capita measure, or the NBER methodology. All three show economic contraction.
Let's start with our "Reality-based" analysis:
The only conclusion an honest read of inflation produces is that both Q4 2007 and Q1 2008 were positive in nominal terms, but negative in Real terms. Remember, the goal of GDP should be to figure out how much the economy is expanding or contracting -- not how much prices rose.
By any honest measure of inflation -- and not the 3.5% BEA price index for gross domestic purchases -- both of the past two quarters would have been negative. How can we have an understated inflation rate of 4%, and a GDP Price Deflator of just 2.6%?
2) The NBER methodology: The 2 consecutive quarters of GDP contraction is not the only metric for identifying recessions. According to the econo-geeks at the National Bureau of Economic Research, a recession is defined as a "significant decline in economic activity spread across the economy, lasting more than a few months."
Here's their specific language:
"Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology."
Hence, if we follow what the people who actually determine what is and isn't a recession say abnout the matter, and not just limit our analysis to GDP, then its pretty clear we are now experiencing an economic contraction.
Rex Nutting reminds us that 1) After-tax inflation adjusted incomes have been stagnant since September; inflation-adjusted sales have fallen at a 5.2% annual pace in the past three months, and are essentially unchanged from six months ago; industrial output has stalled;
UPDATE: Rex adds that spending on services rose 3.4%, including a 14% rise in real spending (seasonally adjusted) on household heating. It’s quite likely that this figure doesn’t accurately adjust for the rising cost of natural gas and heating oil this year. About one-third of the total increase in GDP ($17.4 billion) was an increase in the spending on heating costs ($5.5 billion). Hence, even more Inflation-driven GDP.
By any reasonable measure of the NBER delineated metrics, we are already in a recession.
3) Per Capita Measure, favored by Merrill Lynch North American Chief Economist David Rosenberg, is to simply look to see if the economy is expanding faster than the population. With the US population expanding by 1.0 - 1.5% per year, it takes economic growth of at least that merely to stay in place. Hence, Rosenberg's claim that GDP growth on a per capita basis is actually are contracting sine Q4 2007.
Previously:
Merrill Lynch: Per Capita Recession Began in Q4 (April 2008) http://bigpicture.typepad.com/comments/2008/04/merrill-lynch-p.html
GDP, Inflation & Recession
http://bigpicture.typepad.com/comments/2008/04/gdp-inflation-r.html
Sources:
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)
APRIL 30, 2008
http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp108a.pdf
Business Cycle Dating Committee, National Bureau of Economic Research
NBER, January 7, 2008
http://www.nber.org/cycles/jan08bcdc_memo.html
Global Inflation Continues to Accelerate
Phil Izzo
Economics Blog, April 29, 2008, 11:30 am
http://blogs.wsj.com/economics/2008/04/29/global-inflation-continues-to-accelerate/
U.S. could have recession without drop in GDP
Analysis: Growth isn't everything; jobs and incomes count more
Rex Nutting
MarketWatch, 8:50 a.m. EDT April 30, 2008
http://tinyurl.com/4cab83
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Comments
Come on Barry ... this ain't no recession!
Since we now know that no recession is in the cards, and this "economic slowdown" was V shaped, and we're already growing again in April, The Fed can now stop ignoring one of its primary functions of Price Stability. Heck, The Fed can take back all those rate cuts, and raise rates 350 bps this morning. Right?
The Fed better stop worrying about Wall Street, and start focusing on Main Street ... otherwise the villagers will start gathering with pitchforks and torches soon. And yes, I'm the Bozo now paying a C-Note to fill up my X5 in SoCal!
BTW, Am I the only one that is still shocked that the Fed signed on to the $10 Bear Stearns deal? WTF! Wall Street pushed and they got what they wanted. And now the deal is back stopped by the tax payer. Fu*K This!
Posted by: Donny | Apr 30, 2008 10:33:53 AM
Both durable and non durable spending was negative this quarter. That only happens during recessions.
Thought the housing bubble was bad? Welcome to the business construction bubble. Nonres structures over the past 4 quarters, up 26%, 16%, 12% and now -6%, that's a pattern.
But don't worry exports will save us. Up 19%, 6.5%, and now 5.5%. Is this a negative sloped pattern?
Lastly GDP activity is up 0.29% over the last 6 months slowest since... yep the middle of the 2001 recession.
Posted by: Michael Donnelly | Apr 30, 2008 10:34:49 AM
Can someone tell me, is Mankiw shooting for irony here??
http://gregmankiw.blogspot.com/2008/04/recession-what-recession.html
Posted by: gmf | Apr 30, 2008 10:41:02 AM
Yet strangely Mr. Donnelly, spending on services was up. This was mainly due to Housing Services (and partially due to spending on electricity and medical care, both largely driven by prices). I'm not sure what housing services actually entails, but it doesn't make any sense that it can have increased only slightly less than its average since 2006.
Posted by: Kirzner | Apr 30, 2008 10:47:54 AM
Could Barry directly refute Brian Wesbury...mano-a-mano. Brian is confident this is no recession and doesn't think it will become one. I don't believe him, but he has held this view since the beginning and he "called" the last recession.
I thought he would throw in the towel when employment went negative, but he didn't. Is it just a matter of time, or is he on to something?
Posted by: Mephisto | Apr 30, 2008 11:03:54 AM
the price deflator recieves a lot less attention than it should. I would be interested to learn more about its validity. The CPI gets more than its share of attention.
Posted by: nick gogerty | Apr 30, 2008 11:15:11 AM
Gross Domestic Income Contracted 1.0% in the Fourth Quarter. Gross Domestic Income (GDI) is the income-side equivalent to the GDP’s consumption-side measure. As in double-entry bookkeeping, both sides should equal each other, with both measures showing the same rates of growth.
Such rarely is the case, however, and sometimes the pattern of differences between the two series is suggestive of more than simple reporting inconsistencies. The differences between the two series are resolved mathematically by adding a statistical discrepancy account to the income side, and the discrepancies have been soaring.
The amount of discrepancy (not adjusted for inflation) moved from a negative $40.8 billion in Q2 2007, to a positive $84.8 in the third quarter, to a positive $139.9 billion in the fourth quarter.
The positive discrepancy means that GDP is being overstated relative to GDI. As a result, where third- and fourth-quarter real (inflation-adjusted) growth rates were 4.9% and 0.6% for the GDP, the GDI saw a growth rate of just 1.2% in the third quarter and a contraction of 1.0% in the fourth quarter. Both sets of numbers are supposed be legitimate, but the GDI is showing the economy already to be in contraction. The details here will be updated in a month or two, when the first-quarter GDI is released.
Posted by: John Williams | Apr 30, 2008 11:16:27 AM
If the deficit is in the $400-500B range (if you included the off-budget Iraq, Afghanistan, Katrina, etc it's more - the y-o-y increase in Federal government debt is $200-300B more totally $500-700B easily)
...then Federal government deficit spending equals roughly 2-4% of GDP which means the entire Bush year's "growth" in GDP can be chalked up to their wild-eyed government spending.
...fiscally conservative my asshat.
Posted by: VennData | Apr 30, 2008 11:19:56 AM
Congratulations, You missed a 10% run in equity prices in six weeks by actually believing that current negative stories would have any affect on the stock prices.
Some of you may have even lost money shorting the market into unsustainable anxiety, panic and negativity. I like this blog, but every story posted here has been unanimously bearish. The BP also managed to top tick the Euro with the funny cartoon of the Euro giving it to the dollar.
So, don't let this blog be your sole source of viewpoints and info.
This market will continue to chop and grind higher as we get the weak shorts out. -AT
~~~
BR: Who missed it?
Two months ago, I said on January 23rd, you could buy stocks for an 8, 10, 12% rally. That has now come to pass --
But what does that have to do with the state of the economy?
Posted by: Andy Tabbo | Apr 30, 2008 11:27:18 AM
Andy,
Who missed what over the last 6 weeks? I didn't and a lot of people here took advantage of an oversold bounce. It may well continue.
I don't view this blog as being perma-bearish. We are all big boys here.
Trade em if you got em..
Posted by: Ross | Apr 30, 2008 11:42:19 AM
“By any honest measure of inflation … … both of the past two quarters would have been negative. How can we have an understated inflation rate of 4%, and a GDP Price Deflator of just 2.6%?”
A related issue concerns the determination of real GDP using the price deflator. The formula is as follows:
Real GDP = 100 X (nominal GDP/price deflator)
What this equation says is that, no matter how large the GDP price deflator might be, a positive nominal GDP can NEVER give rise to a negative real GDP. I’m not an economist, but this makes no sense to me at all. If nominal GDP is small (e.g., 0.5%), it could very be the case that REAL GDP is negative. But the equation above would preclude that conclusion from being reached.
So I would question whether “real” GDP can actually be achieved using the equation above.
Posted by: DL | Apr 30, 2008 11:46:06 AM
I think the BR's current trading call is a bear market bounce to SP500 1400 or so.
Not 100% sure though, he hasn't reiterated it in a while.
Posted by: Vermont Trader | Apr 30, 2008 11:47:46 AM
Nick G,
You may want to start here.
Posted by: Estragon | Apr 30, 2008 11:52:47 AM
DL,
Real GDP can never actually be negative, you are mixing up growth of real GDP and the figure itself. The 'negative real GDP' you refer to is GDP growth. The equation is for GDP itself.
When it comes down to it, the argument of whether or not we are in a recession really revolves around 2 pieces, the deflater and population adjustment. If economists and pundits disagree on these two, than both sides (the bulls and bears) can simply stand by their arguments and point to their assumptions leading to their conclusions. Really in the end, whether or not we are in a recession is unimportant.
For me, the length of the recession/mild growth is the only issue. And I don't think Ben has been doing much to ease my concerns there.
Posted by: colin | Apr 30, 2008 11:55:20 AM
Yes, I also believe Barry's trading call was for a bear market bounce, saying that 'downturns do not go in a straight line', or something that effect to back up the bounce call.
Posted by: UrbanDigs | Apr 30, 2008 11:58:17 AM
Ross,
Good for you. I'm not saying the readers and posters of this blog are perma-bearish. I'm just saying that every story on this blog in the last several weeks has been uniformly bearish.
Also, if you believe that the current stories you read and hear are predictive of future market movements, then you're deluding yourself. So take this fine blog for what it is...the viewpoint of one person who is posting information that comports with his view.
And remember, the "news" always follows the "trend."
~~~
BR: Andy, there is a Google search box upper right hand side
Here's a quote from April 1:
"Thus, we do not want to maintain short positions for the next few weeks, as we believe this rally is a classic bear market bounce, and it presents a selling opportunity later this month."
Posted by: Andy Tabbo | Apr 30, 2008 12:01:12 PM
I am certainly no economist so perhaps someone can help me here...
It seems that close analysis of macro-economics and debunking Government reports is searching for reality where reality is not a primary factor with investment decisions. It seems a bit rational to seek "the truth" when the investor herd is more irrational, especially in times of uncertainty.
Perception is reality. I imagine the American consumer will decide our ultimate fate. They will spend when perception is positive and spend less when perception is negative.
If we can actually determine "the truth" and reveal that we are or are not, in fact, in a recession, then what does one do with the information?
Are investment decisions any different?
Are we judging which is the prettiest girl or are we judging which is the girl the judges think is the prettiest?
Posted by: The Financial Philosopher | Apr 30, 2008 12:09:44 PM
Okay, we're in a recession. So what can we do now? What should the Fed do?
If they were to officially announce the biggest recession ever since the great depression, how would it affect the economy?
Is there really NO possibility of the USA not being in a recession and is only in a V-shaped slowdown like Donny said??
Posted by: Anthony | Apr 30, 2008 12:15:30 PM
Kirzner,
Are you suggesting folks should do their patriotic duty and freeze to death?
Household operation expeditures were up 7% in the first quarter. (nominal was up 11%) That includes heating the home.
Folks were able to stop driving so much (a little) Household transportation was down only 2.1%, prior quarter was 2.8%. But the actual out of pocket was monster up 7%.
So if to heat your home you had to shell out 11% more, and to drive you had to shell out 7% more. That's a good thing???
No, no, no. Households were forced to cut spending everywhere and I mean everywhere to be able to keep themselves warm and get to work.
Within that "great" services number.
Medical spending down
Recreation down and in fact negative
Recreation:
3q 2007 +3.5%,
4q 2007 -0.1%,
1q 2008 -1.1% That's called belt tightening people.
Oddball number. "Other" spending was way up (+5% was 0.4% last quarter), we get detail on that tomorrow.
Posted by: Michael Donnelly | Apr 30, 2008 12:18:49 PM
Andy,
When did we say we were short? I am bearish on the macro level and quite frankly don't see how we dont come out of this mess without a severe recession. But, does that mean I can't short term trade long? I am with Ross. I have posted several times that 1420 on the S&P just seems way to easy. Thats my trading account. Now my 401K, that has been in cash since last year, and there it will stay for awhile. I think your point was that traders/investors that let their emotions take over miss alot of oppertunties. Now that I can agree with.
Now, after watching Don Luskin and Jerry Boyer gush over the economy last night on Kudlow and grill Joe B. was simply amazing. I admit seeing their 'bottom ' calling and their ego's getting crushed over the next 6 months will be nice to see. According to Don and Jerry, we were never in a recession and even if we were, it's over..
Thanks BR for posting the real numbers.
Posted by: B.B. | Apr 30, 2008 12:28:22 PM
Barry had already two tradeable bottom calls this year (quite spot on) for 8-10% - the first bounce was weaker, this second one is maybe a bit stronger than expected.
Posted by: Ivo | Apr 30, 2008 12:30:40 PM
Why do you hate America? There are so many happy things -- new puppies at the White House, soldiers painting schools and handing out Bibles to kids, interviews with the life coaches of Idol contestants. So why do you waste our beautiful minds with cynical things like this? Also, some of the big words sound French, which makes me feel icky and sensual, in a vaguely erotic way.
Posted by: Roger Bigod | Apr 30, 2008 12:47:00 PM
Financial Philosopher,
I agree with your general point. We are indeed trying to determine not which girl is prettiest, but rather which girl will be judged as prettiest by others.
I'm not so sure about US consumers doing the judging though, at least not over the longer term. Ultimately, I suspect it will be the judgement of the US's major external creditors which prevails.
Posted by: Estragon | Apr 30, 2008 12:49:53 PM
Sell in May and go away. Or better yet short the sp500 at 1400 on April 30th and wait for reality to bite.
I'm net short and bearish right now.
Posted by: Vermont Trader | Apr 30, 2008 12:50:58 PM
Donnelly, I agree with you for the most part. I'm just saying the housing number was the most surprising. And the housing services number isn't the same as housing operation (electricity and what you refer to in your post). Housing is a big number compared to electricity and gas or other housing operation. I wouldn't mind more information about other, but I'm sure it would be hard to say one way or the other which direction it should go. I still don't get why housing services are up in the middle of a housing-led downturn (granted that residential investment is down).
Posted by: Kirzner | Apr 30, 2008 12:55:12 PM
