0.6 + 5.0 + 2.0 = recession-ish

The BEA's advance estimate of real GDP reported growth at an annual rate of 0.6% - slow, but positive - for the first quarter of 2008 (the same rate as the last quarter of 2007). Consumption contributed positively (growth in services consumption outweighed a decline in goods consumption), as did government purchases (especially federal defense expenditures) and net exports (partly thanks to the weak dollar). Declining investment - particularly residential (i.e. new housing, down 26.7%!) was a drag. Inventory accumulation made a large positive contribution, which is somewhat worrisome because it suggests firms are piling up unsold goods and therefore might reduce output in the future. However, it should be noted that inventories were falling in the fourth quarter of '07, so the increase might partly reflect a return to normal stocks.

Since output is not falling, this would not meet the NBER's definition of a recession. However, by a useful rule of thumb - Okun's law - the economy needs to grow around 3% to keep unemployment from rising (because the labor force is growing and productivity growth increases the amount of output each worker can produce). So while economics professors who are being careful in their choice of words won't call it a "recession" we are in what Brad deLong is calling a "recession-like episode" and, as Paul Krugman puts it:

...[T]he official definition of recession has become delinked from peoples’ actual experience. Right now, we’re in an economy with deteriorating employment and incomes, collapsing home prices, and business retrenchment. Is it also an economy in recession? Who cares?

This Tom Toles cartoon makes a similar point. And, of course, the GDP numbers are subject to revision, as Menzie Chinn notes.

About that deteriorating employment.... the April report from the BLS reported a decline in the unemployment rate from 5.1% to 5.0% (which suggests a GDP growth rate >3% in April), and, in this case it is not an artifact of discouraged workers leaving the labor force. In the household survey, the number of people employed increased by 360,000, the number unemployed decreased by 189,000 while labor force participation was basically unchanged (increasing from 66.00% to 66.02%). The establishment survey reported a decline in "nonfarm payroll employment" of 20,000; the result of a decrease of 110,000 jobs in goods producing sectors and an increase of 90,000 in service employment. Not as bad as expected, but the overall picture is still un-good, according to the Times:

Companies are cutting working hours, even as many avoid layoffs. Those working part time because of slack business or out of failure to find full-time work swelled from to 5.2 million in April from 4.9 million in March. In percentage terms, employees working part time involuntarily climbed to the highest level since 1995.

The average weekly pay for rank-and-file workers — about 80 percent of the American work force — fell $3.55 in April, to $602.56 in inflation-adjusted terms. This figure has been generally falling since the end of 2006. Gains in pay have been canceled out by the soaring costs of food and energy.

“The punch line is that you don’t have to lose your job to get pinched in a recession,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “Understandably we focus on layoffs and job losses, but most people keep their jobs in a recession. People who held their jobs are losing ground both in terms of hours and hourly wages.”

The Fed, though, may be done helping for now. On Wednesday, they announced a reduction in the Federal Funds rate target of 0.25% to 2.0%. Their statement hinted that we may have reached the end of the easing cycle (which began last September when the rate target was cut from 5.25% to 4.75%):

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Since monetary policy affects the real economy with a lag, there should be a boost in the pipeline for this summer and fall, and the Fed may need to turn its attention to shoring up its anti-inflation credibility. Or, in the statement's Fed speak:

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The Presidents of the Dallas and Philadelphia Feds, Richard Fisher and Charles Plosser, voted against cutting for the second consecutive time, apparently thinking the Fed has gone too far already. That also seems to be what Allan Meltzer thinks, according to the Times: “My view is that the Fed is back doing the silly things it did in the 1970s, of trying to make judgments that have long-term consequences based on short-term data.” The futures markets expect the Fed to hold the line at 2.0% at the June meeting.