Wow, those are some bad GDP numbers

I just wrote a quick piece for TIME.com on this morning’s GDP release. The conclusion, for those who’d prefer to skip all the numbers and stuff:

Unless it ends suddenly tomorrow, all signs are that this will stack up as the worst economic downturn in the U.S. since the Great Depression. But if government spending is able to begin stabilizing the economy sometime in the second half of this year, the scale of the decline in indicators ranging from GDP to employment to consumer spending will be much closer to that of the harsh recessions of 1981-1982 and 1974-1975 than the near-complete economic collapse of the 1930s. Will the stimulus work? That’s the $770 billion question the new GDP numbers really don’t answer.

Also, after I wrote the TIME.com piece, I got an e-mail from former TIME economics correspondent Bernie Baumohl, who now has his own forecasting firm. He addresses the question of why the downward revision in GDP was so big:

One area was in miscalculating the change in inventories. In the initial report, the government believed the change in business inventories increased by a $6.2 billion annual rate. That turned out to be flat wrong. As new data arrived, we see that inventories instead plummeted by a $19.9 billion rate. A second miscalculation was consumer spending. The advance report noted a 3.5% decline, while today’s release revised it to minus 4.3%. Net exports were also problematic for forecasters. Last month, foreign trade was viewed as adding to GDP growth (by 0.9 percentage points). Not so. The revised report said that trade had so deteriorated, foreign trade ended up subtracting from growth (by 0.46 percentage point.)

Basically, the issue seems to be that the economy made a really dramatic shift in the fourth quarter, and because the BEA’s early GDP estimates rely on a lot of numbers extrapolated from previous quarters, they missed the severity of the shift. Here’s hoping that will happen in the opposite direction two or three quarters from now.

Finally, Barbara pointed me to a very interesting passage from the new (to the U.S., at least; it was published in the U.K. in 2007) book The Numbers Game, by Michael Blastland and Andrew Dilnot, on GDP estimation biases in better times and how they differ from country to country:

The problem is that the fastest-growing parts of the economy are often new, comprising businesses that simply weren’t there before. If we counted every cent of economic activity as it took place, we’d know all about them, but we don’t. Not until they file their returns to the Internal Revenue Service do we get a proper sense of where to find the latest boom. So in order to measure economic growth, what do we put in our sample of businesses? Businesses that we already know about, what else?

Oddly enough, this does not lead to an underestimate of growth, since the problem is known and understood. The figures are adjusted, with am estimate of growth in new areas. However, that estimate is usually too high, and initial reports of GDP growth in the United States are almost always revised down.

In the UK, by contrast, this new growth is simply ignored until the tax returns come in to tell us what it was. … This has led to an initial underreporting of GDP growth in the UK typically by about half a percentage point. When growth moves along at about 2.5 percent per year, that is a big error.

In consequence, for the last ten years the UK has believed itself underperforming compared with the United States, when in fact it might have been doing every bit as well. By the time more accurate figures come out, of course, public attention has moved on, thinking the United States a hare and the UK a sloth.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

seandougherty

Has anyone seriously asked the question “why do we expect government spending to stabilize the economy?” Spending exploded during the Bush II administration leading to record deficits. Why did that spending not stimulate the economy but this spending will?
Justin Fox

@seandougherty: First, it probably did stimulate the economy a bit. It’s just that such stimulus is never lasting. Second, the Bush II deficits were only record-setting in current dollar terms; by the more meaningful standard of % of GDP they were much smaller than those of the Reagan years. Finally, I’ve been asking your first question for weeks, and the main answer I’ve gotten is, “Well, it sure seemed to work during World War II.”
plukasiak

re: sean:

first off, in terms of stimulative value, all deficits are not created equal. A dollar in deficit spending can have near 0 stimulative impact, or it can add $2.50 to $3.00 or more to the economy based on “the churn”.
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Tax cuts, for instance, are a lousy way of trying to stimulate an economy, because
1) middle income America will use much of the money to pay down existing debt
2) the wealthy will simply add it to their investment portfolio — and most investments (like the stock market) don’t create any jobs
3) Lower income America will probably spend the money, but much of it will go toward cheap imported goods — providing very little in the way of a stimulus in this country
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and not all govern spending has the same stimulative effect — the war in Iraq is an example of massively inefficient (in terms of stimulating the economy) deficit spending.
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The reason why WWII was so good for the economy was based not just on massive increases in spending, but how that money was spent. WWII meant huge investment in manufacturing infrastructure and production of everything from airplanes to uniforms. But WWII also helped in terms of employment thanks to the draft — to the point where the shortage of workers necessitated employing women (“Rosie the Riveter”) and African Americans in jobs that were, prior to the war, the near-exclusive province of white males.
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The Iraq war did little in terms of spurring manufacturing; one of the ways that Bush hid the true cost of the war was in simply using up military equipment without replacing it — to the point where military units leaving Iraq were told to leave much of their equipment in place, because the units replacing them were missing much of their own equipment used/destroyed during previous tours in Iraq.
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The reason why job creation is the most efficient means of stimulating the economy through deficits is simple — every dollar paid out to an American employee adds $1.00 to the GDP, and when that dollar is spent, it adds another dollar to the GDP. Now, this money may be spent on cheap imported goods just like tax cuts to lower income americans, but its that extra dollar that is paid to the employee that makes job creation so much more efficient in terms of stimulating the economy.
tanboontee

The drop in GDP is real scary, right? Well, the worst is still lingering on the horizon. We are living in one of the most exceptional and engaging time. So, be prepared.

Come to think of it, who would want or even dare to trust the Wall Street nowadays? Terribly bashed investors’ confidence is in an all time low, not witnessed perhaps since the Great Depression.

One would be wondering if the White House “CHANGE” team is doing everything right in the quickest possible time (albeit more haste less speed). Otherwise be prepared for a scenario that could be likened to the aftermath of a war of the 3rd kind – long sufferings and chronic devastation.
(Tan Boon Tee)
plukasiak

One would be wondering if the White House “CHANGE” team is doing everything right in the quickest possible time (albeit more haste less speed).
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my sense is that they’re getting it wrong, because of an over-reliance on stock prices as a measure of overall economic success, and loan volume as a measure of success in the banking industry. Its like jump-starting a battery when a car’s electrical system is shot…you can probably get the car started again, but its going to break down because the problems isn’t a dead battery, but a bad alternator and shorts throughout the system.