US Q1′2008 GDP numbers – Not in a recession? Please.
April 30, 2008
Let’s Assume the GDP (Gross Domestic Product) metrics are an accurate assessment of the economy’s activity (it’s not, and neither was the now out of favor GNP numbers, but that’s a blog post for another time). The Reuters article, like many others today, Growth surprises but consumers stressed – Yahoo! News: leads off with “A buildup in inventories kept the economy afloat in the first quarter…” The fact that GDP grew at 0.6% in Q1 because of an inventory buildup is probably more troubling than if GDP shrank. What is likely happening is the the economy is decelerating quicker than businesses are able to react. Fortunately this article, in paragraph three states this possibility.
” Some economists said the report suggested the U.S. economy was on a bit firmer ground than had been thought, but others braced for worse times ahead as businesses ratchet back production further to try to sell off inventories”
While I’m not in favor of overly negative press accounts of economic conditions as there is some truth into “talking ourselves into a recession”, it is disingenuous to try and pass these numbers off as better than expected, which seems to be the trend of the day.
July 15, 2008 at 9:39 am
Question from a finance novice… I thought that a recession is defined as 2 consecutive quarters of negative growth in the GDP. the Q1 GDP of this year was +0.9%… how is it that the news is qualifying this as a recession? The economy is bad–YES, but a recession-no, right? I am not trying to downplay our economic situation, I am just trying to improve my finance chops and gain a better understanding…
July 15, 2008 at 11:34 pm
Hi JoeD,
Thanks for stopping by. The technical definition of a recession is truly negative GDP growth for two consecutive quarters. My argument was that the small growth of that quarter due to a build up in inventories was not indicative of true economic growth but rather economic contraction that the GDP didn’t accurately reflect.
If a clothing store buys 100 shirts in anticipation of selling them but doesn’t because buyers are willing to make the purchase. This shows up as GDP growth of that quarter (a build up of inventories) until the clothing store writes down the loss which could happen in a subsequent quarter.
Hope this helps.
Thx,
Mike
September 3, 2008 at 4:08 am
So the definition of recession is wrong. Growth is growth. The economy is living. Inventories are kept several ways both last in and first out. Nice analogy though. The Economy (U.S.) will continue to chug along period. When Negative growth happens, then accurately title your pieces; It is what it is; and the store in question’s “subsequent loss” is another store’s gain thus even more growth.
Cheers – Get this – Williamson Cadillac, Hummer & GMC – Miami, FL – Still chugging along.
JS
September 3, 2008 at 5:55 am
Hi John,
Technically you are correct, the current methodology of measuring economic output says that Q1 was not a recessionary quarter. I contend that a build up of possibly unused inventory indicates a weaker economy than what the GDP numbers say. If the store is carrying excess inventory one quarter, it will either return the inventory back to the supplier(s), write it off as a loss, or carry it into the next quarter not needing to replenish.
It is very easy for economists to take a broad number like GDP and make an arms length judgment about the strength of the economy. Ask someone living in Modesto, CA where 3 out of 4 homes that are for sale are in foreclosure if the economy is in a recession or not and I suspect they would claim that it is.
In hind sight , Q2 didn’t turn out to be as bad as I thought it would be (based on GDP), probably due to the refund checks. As far as the long term state of the US economy goes, I’m very bullish. It will take some time to unwind from the credit binge of the past decade and get the dollar’s value back into it’s proper valuation against other currencies, but our economy is resilient and efficient.
I appreciate your comments!
Thx,
Mike