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.
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.
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%
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.