Friday, May 29, 2009

The Incredible, Shrinking GDP

Last week I offered a round-up of the economic news from around the world.

Today the news is buzzing with the latest numbers from the U.S..

This morning's news release from the Bureau of Economic Analysis shows that U.S. GDP fell at a 5.7 percent annualized rate during the first quarter of 2009.

A common refrain in the commentary is that this is not as bad as feared (indeed, the story at the Christian Science Monitor is headlined "U.S. Recession Eased in First Quarter"), since the fourth-quarter 2008 numbers showed a slightly sharper 6.3 percent rate of contraction, and preliminary estimates for Q12009 were in the 6.1 percent range. Additionally, as the coverage in Forbes notes, there is some hope among economists surveyed by Dow Jones newswires that the data will be revised downward further to a 5.5 percent rate of shrinkage.

Of course, the word that the news is slightly less bad than the awful picture earlier predicted leaves the news still awful-indeed, the second-biggest one-quarter drop in GDP in twenty-seven years (the first being in the previous quarter, of course) since the brutal recession of the early 1980s (itself, the deepest since the Great Depression in many ways). Additionally, it marks three consecutive quarters of shrinkage in U.S. GDP, a first since 1975, as the BBC noted in its report.

And it is worth examining the numbers more closely.

In the words of the Washington Post's blunt assessment, the data
continued to show a near-collapse in business investment, with spending on equipment and software falling at a 33.5 percent annual rate, and investment in structures falling at a 42.3 percent rate. Those numbers continue, even after the revision, to support the idea that businesses are aggressively trimming their sales, unwilling to take any risk.
Moreover, "Gross private domestic investment continued to be a major factor in Q1 GDP decline, plummeting 49.3%, the largest decline since 1975" according to (Incidentally, it is this which has pushed up corporate profits, by about $42.6 billion, though by only a sixth of the $250 billion drop in Q42008. According to the Wall Street Journal, "Year-over-year, profits were down 22 percent.")

Indeed, the BEA release notes "larger decreases in private inventory investment and in nonresidential structures" compared with the previous quarter.

It is also worth noting that one reason that the GDP numbers were "not as bad" as feared is a slight uptick in consumer spending (consumer durables-goods expected to last over three years-playing an important role), and the fact that imports (a subtraction in GDP) fell more rapidly than anticipated. (The unrevised number is 34.1 percent, "the largest decline since 1975.") The export numbers were a little better than anticipated, but at an updated rate of 28.7 percent, still showed their "largest decline since 1971."

Sharply reduced investment, nervous and tight-fisted managers, and the weakening of exports even below their "normal" trade deficit-inducing levels are all particularly bad signs (particularly from an employment standpoint), though plenty of analysts are betting on the leanness of inventories (and on government stimulus, not just in the U.S., but elsewhere, and perhaps China in particular) to produce a better second quarter 2009 (better in the sense of a smaller drop, at a rate of maybe just two percent of GDP per year) and a turnaround in the second half of the year.

If so, then the U.S. would be an exception to the general pattern, given the grim prognosis for Europe (EU officials expecting contraction to continue not just through 2009, but 2010 as well), and the severity of the situation in Japan (where the UN's relatively optimistic World Economic Situation and Prospects 2009 anticipates stagnation "at best" for the coming year).

At the very least, it should not be assumed that things can only get better.

No comments:

Subscribe Now: Feed Icon