Friday, July 31, 2009

Recession, Revised and Extended

Real GDP declined at an annual rate of 1% in the second quarter of 2009, according to the BEA's advance estimate. America's new-found frugality continued to be a drag: consumption decreased at a 1.2% rate, even as real disposable personal income rose at a 3.2% pace (presumably thanks largely to the tax cut). Investment continued to fall - nonresidential investment declined at a 8.9% rate, and residential (i.e. housing) at 29.3% (!). Exports fell at a 7% rate, much better than the 29.9% rate of decline in the first quarter. On the positive side, GDP was boosted by declining imports (down 15.1%) and increased government purchases (up 5.6%). Declining inventories showed up as a negative in the GDP numbers (by itself accounting for 0.83 percentage points of the 1% decline), but may bode well for the future as businesses may decide to increase output to re-stock.

Today's numbers came with a comprehensive revision of the entire GDP series. This changes our picture of the past a little bit. Validating the NBER's call of a business cycle peak in Dec. 2007, the new estimates have GDP declining at a 0.7% pace in the first quarter of 2008, compared to the previous estimate of a positive 0.9% growth rate (GDP did tick up in the second quarter of '08 - possibly with some help from the first stimulus, Floyd Norris reminds us - before beginning a sustained decline in the third quarter). Overall, the revisions make the recession look even worse, as the first three quarters of 2008 and the first quarter of '09 were all revised downward (though the fourth quarter of '08 was nudged upward).

The 2001 recession, already a "mild" one, is even shallower with the new numbers, according to the announcement:
For the contraction that lasted from the fourth quarter of 2000 to the third quarter of 2001, real GDP increased at an average annual rate of 0.1 percent in the revised estimates; in the previously published estimates, it had decreased by 0.2 percent.
The BEA is also revising its nomenclature: the "advance" estimates will now be followed by "second" and "third" estimates, rather than "preliminary" and "final." A further reminder, I suppose, that no estimate is ever truly final.

For more on the revisions, see Floyd Norris's article in the Times. On today's numbers, see also James Hamilton, who evokes some memories of my college days:
[S]ome folks are cheering today's news. Reminds me a little of how I've seen people in Minnesota take off their shirts for the first 40oF day of spring, a little shocking to a traveler from San Diego.
[Rest assured, I didn't actually do that]

Zubin Jelveh highlights the "automatic stabilizer" role of declining imports, though Barry Ritholtz notes its hardly a sign of health. Josh Bivens and Dean Baker argue the numbers show the stimulus recovery act is helping. Real Time Economics rounds up the reactions of prognosticators.

Update (8/1): Andrew Samwick looks at the composition of GDP, which highlights the role that declining investment has played. I would add that the 11.2% share of investment in the 2nd quarter of 2009 is the lowest ever in the data series going back to 1947 (mainly due to housing, nonresidential fixed investment was 9.9% of GDP, which is lower than average, but not alarmingly so). At 70.6%, the share of consumption is the highest ever - even though consumption has fallen, output has fallen more.

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