Lessons From the GDP Report: Not Much to Like

The Bureau of Economic Analysis (BEA) released the “advance” estimate of real GDP growth for the second quarter of 2011, along with revisions going back to 2003. The key points from the data are that the recession was deeper, the recovery has been weaker, and the recent soft patch has followed a more discouraging path than was originally indicated.

The Great Recession had a peak (2007Q4) to trough (2009Q2) decline of 5.1 percent in real GDP instead of a 4.1 percent decline based on the earlier data. Cumulative growth from the trough to 2011Q1 was revised down to 4.6 percent from 5.0 percent. Growth in the second quarter has pushed the cumulative gain back up to 5.0 percent, but leaves GDP still 0.4 percent below the peak level in 2007Q4. The steepest decline came in 2008Q4, with output contracting at an 8.9 percent annual rate, much sharper than the previously measured 6.8 percent rate.

Prior to the revised data, the path of GDP growth since the end of the recession had been characterized as strength in the second half of 2009, reaching a 5.0 percent annual pace in 2009Q4, followed by a deceleration and disappointing 1.7 percent growth rate in 2010Q2. The slowdown was largely blamed on the European sovereign debt crisis. Growth firmed in the second half of 2010 before disappointing again in the first quarter of this year. Political instability and attendant high oil prices, along with the disaster in Japan were identified as transitory factors contributing to the second slowdown.

The revised data show a more troubling pattern, with GDP growth peaking in 2010Q1 at 3.9 percent before beginning a more steady decline to 0.4 percent in 2011Q1. This pattern looks less like adverse reactions to isolated events and more like a fundamental problem. The second quarter growth rate of 1.3 percent is a modest improvement, but owes much to net exports and inventory investment. Personal consumption expenditures (roughly 70 percent of total output) slowed to a crawl while state and local government continued to subtract from growth.

We expect growth to strengthen in the second half of the year, but the headwinds are considerable. The current recovery is more fragile than previously recognized and the probability of a double dip recession has increased.

This new data brings into focus the fragility of the recovery and the importance of avoiding mistakes. The Federal Reserve has completed, according to plan, the second round of quantitative easing (QE2) and is committed to maintaining an accommodative policy stance to support economic recovery, although a QE3 is regarded as unlikely.

Meanwhile, on the fiscal policy front, events are less encouraging. The debate focuses more on austerity than new stimulus, and the debt ceiling deadlock has the potential to cause real damage by disrupting credit markets and spooking the stock market. What the economy needs right now is momentum and less uncertainty. Let’s hope the stewardship we get at the very least causes no harm.

 

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