The Bureau of Economic Analysis reported today that U.S. real GDP fell at a 6.1% annual rate in the first quarter of 2009. That's enough to push our Econbrowser Recession Indicator Index up to 99.5%, its highest value since 1980:Q2. This index uses the latest GDP numbers to form a retrospective impression of the economy's status as of one quarter earlier (2008:Q4). We will declare the recession to be over when the index falls back below 33%.

The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2008:Q4 the last date shown on the graph. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.

Leading the retreat in real GDP was a 9.5% drop (quarterly rate) in nonresidential fixed investment. This was enough all by itself to subtract 4.7% from the annual GDP growth rate. There was a comparable drop in residential fixed investment, which subtracted another 1.4% from the implied annual GDP growth rate. The collapse in nonresidential fixed investment was what we expected, given the usual cyclical pattern of plunging business fixed investment in the later stages of an economic downturn. The drop in housing surprised me somewhat. If new home construction does no better than simply hold steady at its current abysmally low rate, the sector will stop making negative contributions to the growth rate.

Because imports are subtracted from GDP, falling imports made a big positive contribution to GDP growth, much of which was taken away by plunging exports. But it would be quite wrong-headed to summarize these twin developments solely in terms of their net implications for U.S. GDP. The simultaneous drop in imports and exports signals an accelerating collapse in world trade, which I see as the single most troubling detail of today's report.

On the bright side, inventory liquidation subtracted 2.8% from the quarter's annual real GDP growth rate, meaning that real final sales were substantially better than GDP. Most importantly, consumption rebounded from the depressed levels of 2008:Q4.

That last development is particularly key, since the historical pattern is for consumption to begin the recovery in the later phases of the recession, even as nonresidential fixed investment is headed down.

Average cumulative change in 100 times the natural log of real GDP or its respective component beginning from the business cycle peak for the 10 recessions between 1947 and 2001. Horizontal axis denotes quarters after the peak.

If you want to see that pattern of recession and recovery blown up on a bigger scale, you can look just at the downturn of 1981-82:

Cumulative change in 100 times the natural log of real GDP or its respective component beginning in 1981:Q3. Horizontal axis denotes quarters after 1981:Q3.

Here's how these series have behaved so far this time:

Cumulative change in 100 times the natural log of real GDP or its respective component beginning in 2007:Q4. Horizontal axis denotes quarters after 2007:Q4.

If this is all unfolding according to historical pattern, that's a source of comfort, because we saw how those earlier recessions ended. If consumption continues to grow, and if residential fixed investment has finally bottomed, then the 2009:Q2 decline in GDP should be milder than Q1, and positive growth by the end of the year could be in store.

Though I grant it takes a little imagination to see that in the graph above.

Technorati Tags: GDP, recession probability, recession indicator index, macroeconomics, economics

A -3.8% annual growth rate was a bit better than the consensus forecast of -5.4%, but no cause for cheer there. The discrepancy is entirely accounted for by inventory accumulation, which contributed +1.3% to the 2008:Q4 figure. Production (which is what GDP measures) was bigger than sales, as a result of which inventories piled up. Real final sales were down about 5.1%, close to the consensus expectation.

Housing subtracted 0.85% from the 2008:Q4 growth rate, but no surprise there-- it's been doing that much, and then some, for three years now. The decline in broader consumption spending exerted a much bigger drag, as it had last quarter. Also in the fourth quarter nonresidential fixed investment-- most importantly, spending on equipment and software-- joined the party, or perhaps I should say party-pooping. There was an impressive collapse in both exports and imports. From the point of view of GDP (which is based on exports minus imports), those combined to a wash. But from a broader economic perspective, plunging imports and exports could be very worrisome, because it signals that the downturn is very much global, and that a key engine that has driven rising living standards for everyone in the world-- efficiency gains from trade-- may be stalling out.

On the other hand, today's number does not mean that the real value of goods and services produced in the U.S. fell by 3.8% in the fourth quarter. The American convention is to report these numbers as annual rates, so that the actual drop within the quarter was only 1/4 the headline number. In fact, the level of U.S. real GDP in the fourth quarter of 2008 was only 0.2% lower than it had been in 2007:Q3, before the current recession began.

Level of U.S. real GDP in billions of 2000 dollars, 2007:Q1 through 2008:Q4.

Although the cumulative decline so far has been relatively modest, the 2008:Q4 quarterly drop is bigger than anything seen in the previous two recessions, and puts it among the dozen worst quarters on record since World War II.

Quarterly growth of U.S. real GDP (quoted at an annual rate), 1947:Q2 through 2008:Q4, with NBER-assigned recession dates indicated as shaded regions.

The number is also sufficiently dramatic to eliminate any question that the economy was in recession in 2008:Q3, pushing the Econbrowser Recession Indicator Index to 88.4%. This is a characterization, using data as now reported through 2008:Q4, of the state of the economy as of 2008:Q3. A value above 67% is enough to trigger a call that the economy was in recession as of the third quarter of last year.

The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.

The basis for the index is described here. The index by definition is a real-time assessment that is never revised and is used automatically to generate declarations (also never to be revised) that a recession has started or ended. When the signal for a turning point is triggered, as the current value has just done, our approach is to use the full sample of currently available revised data as of that date to make a simultaneous declaration as to when the recession most likely began. The current full-sample smoothed inferences (whose calculation is described here) are summarized in the table at the right. There is not a very sharp demarcation in choice of the date, though following our previously announced procedure, we date the recession as beginning in the first quarter for which the revised index is above 50%. That rule causes us to announce today that the current U.S. recession began in 2007:Q4.

This announcement turns out to be exactly the same final determination as that made by the NBER Business Cycle Dating Committee, which the NBER announced on December 1, 2008. Based on simulated historical performance, the expectation is that our dates will be very similar if not identical to the NBER dates, and will sometimes be announced after the NBER announcements (as proved to be the case this time), but sometimes announced considerably sooner. Unlike the NBER dates, our dates are arrived at by an entirely mechanical, quantitative algorithm.

We will declare the recession to be over when the index falls below 33%.

Technorati Tags: GDP, recession probability, recession indicator index, macroeconomics, economics

New Home Sales were reported jointly by the U.S. Census Bureau and the Department of Housing and Urban Development for November at an annual rate of 407,000, the slowest pace in 25 years, and expected to decrease to 411,000, following a downwardly revised October pace of 419,00, originally reported at 433,000.  Over the month, new home sales decreased by 2.9% from September, while over the year, sales are down 35.3% from the 629,000 pace in November of 2007. The mean price of a new home sold in November increased to$287,500 , from $272,300 in October.  The seasonally adjusted estimate of new houses for sale at the end November is 374,000, down from 381,000 in October. This represents a supply of 11.5 months at the current sales rate. 

Existing Home Sales fell in November by 8.6% to an annual rate of 4.49 million units sold, following a 4.91 million pace in October downwardly revised from 4.98, and 10.6% below the 5.02million unit rate in November 2007.  All regions experiences a decline in Existing Home Sales over the month, while the West is the only region with Home Sales higher than a year ago, by 17.9%.  The national median existing-home price for all housing types was $181,300 in November, down 1% from $183,000 in October, and down 13.2% from November 2007, when the median sale price was $208,800.   Total housing inventory at the end of November rose 0.1% to 4.2 million existing homes available for sale, which represents a 10.3-month supply at the current sales pace.

The Trade Deficit increased to $57.2 billion in October from a $56.6 billion deficit in September.  October exports were $151.7 billion, $3.4 billion, less than September exports of $155.1 billion, and imports of $208.9 billion, $2.7 billion less than September imports of $211.6 billion.  Net exports helped abate diminished GDP levels, and on the report of the trade deficit decreasing in October, the forecast for 4th quarter GDP will be lowered further. Advance 4th quarter GDP estimates are scheduled for release by the Bureau of Economic Analysis on January 30th, 2009 at 8:30 AM EST.

Upcoming Releases
Retail Sales (12/12 at 8:30 AM EST)
Producer Price Index (12/12 at 8:30 AM EST)
Industrial Production (12/15 at 9:15 AM EST)

As has often been the case historically, the announcement itself is a bit anticlimactic, in that pretty much everybody had already reached the same conclusion. I was interested to see that the Business Cycle Dating Committee explained the apparent non-recessionary behavior of real GDP in 2008:Q1-Q2 just as we did last September in terms of the statistical discrepancy between GDP and GDI. From the NBER:

The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis. In concept, the two should be the same, because sales of products generate income for producers and workers equal to the value of the sales. However, because the measurement on the product and income sides proceeds somewhat independently, the two actual measures differ by a statistical discrepancy. The product-side estimates fell slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3. The income-side estimates reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3. Thus, the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.

Mechanical algorithms based on the monthly values of non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales are updated independently (with slightly different specifications) by Professor Jeremy Piger of the University of Oregon and Professor Marcelle Chauvet of the University of California, Riverside. Their separate indexes are both now indicating a 99% probability of recession.

Source: Marcelle Chauvet.

The Econbrowser recession indicator index, which is based solely on the GDP numbers, has not yet triggered a recession call. I am expecting it to do so when the 2008:Q4 GDP numbers are released at the end of January.

As on so many other matters, Calculated Risk was way ahead of the curve. CR began in March of 2008 to add shading to his graphs to indicate that a recession began in December 2007.

Technorati Tags: employment, recession probability, recession, macroeconomics, economics

As expected, the most important factor was the 3.1% drop in real personal consumption expenditures during 2008:Q3. Given that consumption accounts for 70% of U.S. GDP, that by itself would have produced a -2.25% growth rate for real GDP if all the other components of GDP had held constant. Plumeting consumer confidence [1], [2], the end of mortgage equity withdrawal and a worsening employment situation were presumably responsible for the fall in consumption spending. Housing continued to be a drag on the economy-- what else is new?-- contributing -0.7% to the total GDP growth rate. Nonresidential fixed investment, which is key both for a cyclical recovery as well as longer run growth, fell slightly in the third quarter. Growth in exports and a fall in imports made a positive contribution, as did strong increases in government spending, which together kept the GDP total from being far more disappointing. But a weakening global economy and strained budgets for state governments make me doubt that we'll see as strong numbers for exports and government spending in the fourth quarter.

The weak GDP report also led to a further increase in our recession indicator index, which now stands at 46.1% for 2008:Q2. This is an assessment based on a simple pattern-recognition algorithm of whether the GDP data available so far (through 2008:Q3) are more consistent with the statement that the economy in 2008:Q2 was in recession or expansion. The current value of 46.1% means you could easily call it either way, based on the conflicting evidence that the 2008:Q2 growth by itself looks reasonably healthy (+2.8%), but was preceded and followed by much weaker reports. As detailed in my paper written in 2005 with Marcelle Chauvet, we will declare that a recession has begun when the index moves above 67%. At that time we will use the full sample of data that is available at that time to assign a probable date to the beginning of the recession, based on the value of the revised full-sample index available at that time. My current expectation is that we'll issue such a declaration when the 2008:Q4 GDP numbers are reported, and date the beginning of the recession as 2007:Q4.

The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.

Technorati Tags: GDP, recession probability, recession indicator index, macroeconomics, economics

As we teach in any introductory macroeconomics course, it is possible to think of GDP in two different ways. One is as the dollar value of all final sales of goods and services produced by factors of production located within the United States. The second is as the dollar value of all the income generated by that production. The two measures are equal to each other by definition. But in practice, one can try to calculate GDP either using production data or using income data. If we obtain the production and income numbers from different sources, we're certain to end up with different numbers for what is supposed to be the nation's GDP. The difference between "gross domestic product" (GDP) and "gross domestic income" (GDI) is simply reported by the BEA as a "statistical discrepancy."

Federal Reserve economist Jeremy Nalewaik has several research papers ([1], [2]) arguing that GDI may be a more helpful series for recognizing recessions than is GDP. It is interesting that while GDP indicates sluggish growth over the last 3 quarters, GDI looks much more like a recession, with 2007:Q4-2008:Q1 satisfying the traditional rule of thumb of two quarters of falling real output.

Real GDP and real GDI, 2005:Q1 to 2008:Q2 (quarterly growth reported at annual percentage rates). Real GDI calculated by deflating nominal GDI by the GDP deflator. Data from BEA Tables 1.1.1, 1.1.9, and 1.10.

Jeremy has calculated recession probabilities similar to our Econbrowser recession indicator index using GDI in place of GDP. He has a slightly different approach to real-time versus revised data from the one we use, and bases parameter estimates on a sample beginning in 1959 rather than the 1947 starting point that we use. Using the later starting point causes his parameter estimates to imply slightly milder recessions on average than one would infer on the basis of the full data set, so his algorithm is a little more likely to indicate a recession for given slow or negative growth rates than would ours. But the biggest difference is the more sluggish recent behavior of GDI relative to GDP.

Jeremy was kind enough to prepare for me a plot of his recession probabilities calculated on the basis of GDI, displayed in the figure below. Note that this diagram follows the same rule as our index (plotted here)-- the value of the index for any given date is calculated on the basis of the data as it was actually reported at the time. Jeremy's index unambiguously signals that the U.S. economy is now in recession.

Red line: Nalewaik's recession indicator index based on GDI growth rates. Shaded regions: NBER recession dates.

I'm not convinced that there's a compelling basis for claiming that GDI is a better measure than GDP. But in this case, there's another very important consideration. Measures of employment growth and the unemployment rate seem to be signaling pretty strongly that the U.S. is already in a recession, whereas the GDP numbers do not. Which should we believe? Given that one can reconcile the employment and GDP inferences entirely on the basis of the known numerical value for the statistical discrepancy in the GDP numbers, it seems like a pretty clear call to me-- the U.S. economy is currently in a recession which likely began in the fourth quarter of last year.

There's an important implication of this for the ongoing discussion of the current financial turmoil. The U.S. is currently in a recession, and events of the last two weeks are sure to make things worse for the next few months, even if we had some policy to bring immediate stability to financial markets. That is water under the bridge at this point.

The purpose of the Paulson-Dodd proposals is thus not to prevent the economy from going into recession. The purpose is to prevent the recession from turning into a severe contraction.

Technorati Tags: GDP, gross domestic product, gross domestic income, recession, recession probability, recession indicator index, macroeconomics, economics

They state:

According to advance estimates released by the Bureau of Economic Analysis, U.S. real GDP growth was 1.9 percent in the second quarter of 2008. The contribution of net exports to U.S. growth was a robust 2.4 percent. In fact, net exports have partially offset the negative drag from private residential investment especially since 2007 (Chart 2), although this positive contribution could diminish as global growth slows.

The rest of the article is well worth reading. I'd like to just observe that the forecasts for RoW growth might have been overtaken by recent announcements regarding negative growth in Japan, incipient slowdown in the Euro Area and UK, and noticeable deceleration in some of the NICs [1]. Note that for US exports, the export-weighted RoW GDP is the more important.