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
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.
Merrill Lynch: Per Capita Recession Began in Q4 (April 2008) http://bigpicture.typepad.com/comments/2008/04/merrill-lynch-p.html
GDP, Inflation & Recession
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)
APRIL 30, 2008
Business Cycle Dating Committee, National Bureau of Economic Research
NBER, January 7, 2008
Global Inflation Continues to Accelerate
Economics Blog, April 29, 2008, 11:30 am
U.S. could have recession without drop in GDP
Analysis: Growth isn’t everything; jobs and incomes count more
MarketWatch, 8:50 a.m. EDT April 30, 2008