The official headline for U.S. Q1 GDP growth says a positive 0.6% growth but the details are ugly and confirm that we are in a recession.
First of all, if you exclude the increase of inventory of unsold goods (that moved positive after a negative figure in Q4) the Final Sales of Domestic Product were a negative 0.2%. In other terms, inventories of unsold goods added an artificial 0.8% to Q1 growth boosting it from a negative 0.2% to a positive 0.6%. So actual aggregate demand (Final Sales of Domestic Product) – the actual measure of growth of true demand - fell in Q1. And this build-up of inventories in Q1 means that the fall in GDP in Q2 will be larger than otherwise as firms will have to reduce that large inventory of unsold goods via a further reduction in production and employment.
Second, residential investment is in total free fall, collapsing at an accelerating annual rate of 26.7%. But GDP figures underestimate the true fall in aggregate demand as they do not separate residential investment into true final sales of new homes and into the unsold inventory of new homes that are produced and not sold. Thus, all production of new homes is assumed to be sold in the national income accounts data. But we know that home sales are falling more than production of new homes, that cancellation rates (running at a rate of 20-30%) are not included in the new home sales figures and that the inventory of unsold new homes is actually rising. Thus, if the BEA had correctly measured final sales of domestic product, by having a separate line for the change in the inventories of new unsold homes (the equivalent of the change in business inventories), the figure for final sales of domestic product would have been even more negative than the already negative 0.2%, probably a negative 1.0%. So the national accounts make a methodological mistake in measuring final sales of domestic product by assuming that the change in inventories of unsold housing is always zero, something that is obviously wrong especially during a severe housing recession.
Third, now all components of fixed investment (residential investment, non-residential investment in structures and capex spending by the corporate sector (i.e. non residential investment in software and equipment) are now in negative growth territory. This is a major difference relative to 2007 when structures investment and capex spending were significantly positive. The investment recession is now clearly spreading from housing to non residential commercial real estate and to real capital spending by the corporate sector.
Fourth, since the quarterly GDP figure compare the average GDP in the first three months of 2008 to the average GDP in the last month of 2007 even a flat or slightly falling GDP in some months of Q1 is consistent with the average being positive relative to the previous quarter (that is the average of three growing months). And data on monthly GDP (say from Macro Advisers) show that GDP started to fall in February of 2008. This is the typical inertia in growth figures that comes from looking at quarterly, rather than monthly, figure. Thus, the Q2 GDP contraction will be larger than otherwise.
Fifth, both durables goods consumption and non durable goods consumption grew at a negative rate in Q1. What boosted an anemic 1% growth in Q1 consumption was a still positive growth in services consumption. Durable consumption spending is clearly collapsing (-6.1%) But the fact that spending on non durable goods is falling – something that has not happened in decades – is an ominous sign.
Sixth, the only good news on growth came from net exports. But with sharply rising oil prices in the last few months you are going to see a sharp rise in imports of oil and energy goods in Q2 that will further depress Q2 growth.
Finally, the NBER does not use the mechanical rule of two consecutive quarters of negative GDP growth in determining whether we had a recession or not. The NBER looks at a variety of economic indicators and puts more emphasis – among other variables – on employment and labor market conditions. We do know that employment in the private sector has now fallen for four months in a row and that overall non-farm employment (including the government employment) has fallen for three months in a row. So I do expect, leaving aside possible future downward revisions in the Q1 figures, that the NBER will eventually date the beginning of the 2008 recession to the first quarter of 2008.___________________________________________________________________
Comentario de los Especialistas de Washington Post
Washington Post Staff Writers
Wednesday, April 30, 2008; 9:18 AM
The U.S. economy grew -- but just barely -- over the first three months of the year, confirming impressions of sluggish growth but leaving open whether the country has actually slipped into recession.
El Comentario de Floyd Norris___________________________________________________________________
The most surprising part of the G.D.P. report today, at least to me, was the increase in personal consumption. The increase, at an annual rate of 1.0 percent, is the slowest rate of gain since late 1991, but I was still surprised that it was positive. Does this indicate that all the worry about consumers cutting back is unwarranted?
I don’t think so. The details of that increase show that it came entirely from the purchase of services. Real consumption of goods, both durable and non-durable, was down. Most of the gain in real personal consumption expenses came from higher spending on medical care services. Either that means the government underestimated inflation in that area, or it means we used more of those services. Most of the remainder of the gain came from gas and electric utilities. If they got the inflation figures right, that presumably means it was a colder winter. Another large increase was in “other services,” a grab bag category that I can’t analyze.
If we were buying more utilities and medical care in the quarter, that hardly means that consumers felt like spending.
Comentario de Paul Krugman
I’ve had time to look at it a bit more closely — and it’s much weaker than the headline number suggests (and MUCH weaker than the previous quarter, even though the growth rate was the same.) It’s not just that final sales fell, so that the economy grew only because of inventory accumulation. If you look at consumer spending, purchases of goods actually fell substantially. Only service purchases rose — and much of that was housing and medical care. As Michael Mandel at Business Week has pointed out, those aren’t “really” consumer decisions: housing “consumption” is largely imputed rents on owner-occupied homes, and medical care is mostly paid for by insurance.
So this really does look like an economy at stall speed, not an economy skirting past the edge of recession (whatever recession means).