quarta-feira, 7 de maio de 2008

Recessions Often Begin With Positive GDP Data

Recessions Often Begin With Positive GDP Data

After the Advanced GDP came out last week at +0.6%, I was surprised to read a variety of commentary about the economy that was factually incorrect. Several pundits and economists had concluded that since GDP was positive, we therefore could not possibly be in a recession

The meme "Positive GDP = No Recession!" is demonstrably false, as we show in the proceeding pages. 

It took only a brief look at historical GDP data to unequivocally prove this to be the case. We used publicly available GDP data from the Bureau of Economic Analysis and from the Federal Reserve Bank of Philadelphia. The dating of recessions was as per the official tables kept by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER).   

The data so overwhelmingly proves that Recession can and often do begin with positive GDP, that one suspects the people making opposite arguments must never have actually reviewed any GDP data beyond the most recent headline. I have no other explanation for why so many people got this so wrong.

Before we go to the actual data, briefly consider just what a recession is. As formally defined by the NBER, it is the "Peak to Trough decrease in business activity" during an economic cycle. The peak marks the end of the expansion phase and the beginning of a recession. During the other phase of the cycle, between trough and peak, the economy is in an expansion. This is described as the economy's "normal state."

Given that the NBER dates the beginning of a Recession from the economic peak in business activity, one would expect that GDP during that quarter would be mostly positive -- not negative. And in fact, that is what the historical data often shows.

1. Many Recessions begin with a Positive GDP

Let's look at a the beginning of several post-WWII recessions:

• The 1980 contraction was officially dated from January 1980 through July 1980. GDP for the first quarter of 1980 was +1.09%. This contraction lasted only 6 months.

Note the 1980-82 period can be called a "double dip recession, with the next contraction beginning exactly 12 months later -- July 1981 -- and running another 16 months to November 1982. 

• The deeper 1973 recession ran for 16 months, from November 1973 - March 1975. That first quarter GDP was a positive +1.34%.

• The 1957 recession began with a GDP reading of +1.78%. It ended 8 months later in April 1958.

• GDP in the fourth quarter of 1948 was +3.61%. That 11 month recession was dated from November 1948 to October 1949.

• Lastly, its also worth noting that the 1960 and 1969 recessions began almost flat -- they had a marginally negative GDP number of -0.05% and -0.33% respectively.

Hence, the historical data shows that recessions do not always begin with negative GDP numbers,. Of the 11 post WWII recessions, 4 started with positive numbers, two were flattish.

1980:01    1.09%
1973:04    1.34%
1957:03    1.78%
1948:04    3.61%

1969:04    -0.05%
1960:02    -0.33%


Leading Quarter of 6 Post WWII Recessions, GDP

Data source Bureau of Economic AnalysisFederal Reserve Bank of Philadelphia
(Note: I will update this chart with the 1969 recession)


2. Advanced GDP that was Positive at beginning of recessions can be revised to Negative.

In the two most recessions, the Advanced GDP data was reported as positive, only to be revised to a negative Final number as more data became available.

Indeed, we frequently see revisions in GDP data -- in both directions -- as we move through each subsequent release from Advanced to Preliminary to Final.

The business contraction of 2001, as well as the consumer led recession of 1990, each began with a positive Advanced GDP release. However, the subsequent revisions took the GDP data in the negative column.   In fact, there were actually two quarters of positive GDP data during the 2001  recession which subsequently were revised to negative.


Advanced GDP Data and Final Revisions
2001 Q1     2.0%    -0.6%
2001 Q2     0.7%    -1.6%
1990 Q3     1.8%  -1.6%



Data source Bureau of Economic Analysis, Federal Reserve Bank of Philadelphia

Merrill Lynch's North American Economist, David Rosenberg noted that this is "why the NBER, unlike the media, don’t place as much emphasis on GDP when it makes the recession call."

3. Some recessions never have two consecutive quarters of negative GDP 

Lastly, consider the traditional measure of recessions as two consecutive quarters of negative GDP growth. That never occurred during the 2000-2001 recession:

3Q00: - 0.5%
4Q00: +2.1%
1Q01: - 0.5%
2Q01: +1.2%
3Q01: - 1.4%

Although we saw three quarters of falling GDP in 2000 and 2001, none were consecutive.

"Brief & Rare:"

The NBER notes that "Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades." 

The recent comments from Messrs. Mankiw, Wesbury, Kudlow and Pethokoukis that an Advance GDP Release of 0.6% precludes the possibility of a recession were not only factually incorrect, they were quite puzzling. To be blunt, these are people that ought to know better. Chalk it up to Cognitive Dissonance.

I cannot understand why so many people fight desperately against any mention of what has come to be known euphemistically as the R word. Its not only silly -- its bad economic analysis.


Special thanks to Michael Donnelly, Chief Economist, PBP for all his assistance in the preparation of these comments. You can see his most recent commentary on this subject at CEO Economic Update.


Congratulations! Its a Recession! (April 30, 2008) http://bigpicture.typepad.com/comments/2008/04/congratualtions.html

Challenge for Economists: Positive GDP Recessions (May 6 2008) http://bigpicture.typepad.com/comments/2008/05/challenge-for-e.html

Business Cycle Expansions and Contractions  
National Bureau of Economic Research

Recession 2001: Business Cycle Dating Committee
National Bureau of Economic Research  
NBER, November 26, 2001    

Economic Research 

Bureau of Economic Analysis

Confidence or complacency   
David Rosenberg
Merrill Lynch 05 May 2008

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