GDP Sinks Like A Stone
There is nothing unexpected in the news released this morning that the economy, as measured in GDP, sank at an alarming rate in the fourth quarter last year. Here is the government press release: BEA: News Release: Gross Domestic Product
I apologize on behalf of the government for that appalling presentation!
Nonetheless: the news is uniformly bad. The drop of 3.8% is the sharpest since the awful recession of 1981/2. The hidden message is that the news was even worse than this. Because of the accounting rules used to compute GDP the numbers mask a jaw dropping fall of 5.1%. The build up in inventories during the quarter is counted as an investment, which it is of course, and so has to be counted as a positive factor. Remember that GDP is a calculation of aggregate final demand or production [both views are correct and equal the same figure]. This means that unsold final goods have to be added in somewhere even though the fact that they are unsold may be entirely involuntary. It was this build up in inventory that improved the overall numbers from a 5.1% decline to one of ‘only’ 3.8%. Excessive inventory build up is a bad omen for the first quarter this year as we can expect businesses to cut output aggressively to balance out the unsold goods last quarter.
Also buried in the fine print is a reference to the GDP ‘deflator’. This is the index of inflation that the government uses to reduce nominal GDP back down to real [i.e. inflation adjusted] GDP. The fourth quarter saw an eye-popping drop of 4.6% in this very general measure of inflation. The third quarter had seen an increase of 4.5%. This rapid decline in prices comes largely from the drop in energy costs. If food and energy prices are excluded from the deflator it rises back to an increase of 1.2%. Still low but not in deflation territory.
The message to take away from all this is that the economy still stinks. That’s a technical term. The adjustment for inventories I just mentioned will likely depress GDP this quarter and with credit conditions and consumer confidence at their respective current low ebbs there is no reason, credibly, to expect growth any time soon. So I maintain my forecast of declining GDP for the next two quarters at least. I fear we will have to wait until 2010 for growth to start again, and even then it will most likely be weak.
Boring Explanatory Technical Note: GDP = Consumption + Investment [including Change in Inventories] + Net Exports [Exports – Imports] + Government Expenditure
For the Fourth Quarter 2008 these numbers [nominal in trillions] are: $14.26 [GDP] = $9.93 [Consumption] + $1.95 [Investment] – $.53 [Net Exports] + $2.91 [Government Expenditure]
