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Posted: February 11, 2009

GDP stink

Even meager economic growth will be better than nothing

Jeff Thredgold

American economic pain was widespread during 2008’s final quarter, with the overall economy contracting at a 3.8 percent real (after inflation) annual rate. The economy’s decline was the sharpest since the first quarter of 1982 — a period of 26 years. GDP, or gross domestic product, is the broadest and most complete measure of the nation’s overall economic activity. On the surface, the 3.8 percent annual rate of shrinkage was “good” news, since the consensus view of forecasting economists was for a 5.0 percent - 5.5 percent real annual rate of decline. However, the lesser rate of decline occurred for the wrong reason, one which actually suggests that the U.S. economy will be weaker in 2009’s first half than was the prior view.

The 3.8 percent rate of decline followed a 0.5 percent real annual rate of decline during 2008’s third quarter. As such, the U.S. economy finally met the media’s simplistic definition of recession, i.e. two consecutive quarters of declines in U.S. GDP. As noted frequently, however, the American economy has “officially” been in recession since December 2007, a period already reaching 14 months. Recessions are defined by the Business Cycle Dating Committee of the National Bureau of Economic Research. The current recession will likely be the longest since the Great Depression when it presumably (and hopefully) runs its course by late in the year.

The U.S. economy officially grew at a 1.3 percent real rate during 2008, versus a 2.0 percent real growth pace during 2007, with essentially all of the growth occurring during the January to June 2008 period. The 1.3 percent growth pace was the weakest since the last recession during 2001. The U.S. economy is expected to contract at a 2.0 percent to 2.5 percent real rate during 2009.

If misery loves company the U.S. has plenty, with much of the developed world also in the tank. For the first time since WWII, the U.S., Europe, and Japan are in recession at the same time.

Wherever You Look

It would be difficult to find much in the way of good news in the GDP report. To add insult to injury, the data will be revised at the end of February and again at the end of March, with the U.S. Commerce Department then working in further revisions as they see fit down the road:

• Overall consumer spending, which represents nearly 70 percent of total U.S. economic activity, dropped at a 3.5 percent annual rate, the seventh biggest drop on record. The decline, combined with the 3.8 percent annualized spending contraction during the prior quarter, was the first of back-to-back declines exceeding 3.0 percent since such recordkeeping began in 1947, a period of 61 years (

• Spending by consumers on “big ticket” durable goods (those designed to last more than three years, such as cars and appliances) dropped at a 22.4 percent annual rate, the most painful decline since 1987

• Consumer spending on nondurables, including food and clothing, dropped 7.1 percent during the fourth quarter, the largest decline since 1950, a period of 58 years

• Spending by businesses on equipment and software plunged at a 27.8 percent annual rate, the most severe drop in 50 years

• Homebuilders cut spending at a 23.6 percent annual rate

• U.S. exports to the world, one of the economy’s few saving graces during much of the past two years, fell at a 19.7 percent annual rate, the sharpest decline since 1974

• Government spending increased 1.9 percent during the fourth quarter, after rising at a 5.8 percent rate during the prior quarter

Better news saw prices paid by consumers decline at a 5.5 percent annual rate, the sharpest decline since quarterly data became available beginning in 1947. The decline, driven by sharply lower gasoline prices, did boost consumer “purchasing power” during the quarter. However, the sharp decline also raised the specter of deflation, a highly unfavorable development, despite what one might think.

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Inventory Blip

Note that GDP is a measure of what is produced, not what is sold. Consumer spending fell so quickly during the fourth quarter that manufacturers were not able to trim production fast enough.

The resulting rise in inventories led the GDP measure to be 1.3 percent less painful than expected, resulting in the 3.8 percent rate of decline. GDP would have fallen at a 5.1 percent real annual rate with inventory data excluded. Such an inventory rise suggests that production will be curtailed even further in coming months, contributing to even weaker U.S. economic performance.

What It All Means

The current recession—already long in the tooth—will be with us for some extended time to come. Surveys of seasoned economists of the past two weeks by Blue Chip Financial Forecasts and USA Today, both of which I participated in, suggest that the recession will give way to weak, but at least positive, U.S. economic growth beginning in 2009’s third quarter. I have felt that such growth would not return until the fourth quarter. That still seems a reasonable view. In the meantime, the U.S. economy will likely be weaker statistically during the current quarter than was the view a couple of weeks ago. Current quarter weakness could reach a 5.0 percent real annual rate of decline…or more (or is that less?).

The Turn

• At some point, however, the enormity of Federal Reserve monetary stimulus will kick in

• At some point, the unprecedented amount of fiscal stimulus will kick in.

Financial assistance to states will help trim additional layoffs, while the enormousamount of earmarks (pork barrel spending) in the proposed stimulus plan will have a minor impact. Any move toward additional tax cuts in the plan, and less pork-flavored spending, would be an improvement

• At some point—likely sooner rather than later—the stock market will begin to rally in a meaningful way

• At some point, the Business Weeks and the Newsweeks and the Fortunes of the world will run positive, upbeat covers—rather than trashing the economy—such as “What a Great Time to Buy a House” or “What a Great Time to Hire Talented People” or “What a Great Time to Buy Stocks.”

This sea change in reporting will help boost consumer and corporate confidence. A more balanced, more positive approach by the national media — what a concept!— will help establish a foundation for a return to positive, if meager, U.S. economic growth. Meager U.S. economic growth doesn’t seem all that exciting…

…but it’s a start
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The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is
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