• Markets
• Economy
• Federal Reserve
• Housing
• Energy
• Digital Media

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

Wednesday, April 30, 2008 | 09:49 AM | Permalink | Comments (47) | TrackBack (3)
add to de.li.cious | digg this! | add to technorati | email this post

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