Remember when I said the following:
GDP as reported
From my view point point, the interesting bit about GDP is NOT inflation (i.e. real vs. nominal GDP), but rather the fact that the number which is reported is a first derivative. It is the change in GDP which is reported, not the actual number. And, this is significant because generally a business cycle troughs when the change in GDP goes from being negative for a significant period to being positive for a significant period. Equally, a business cycle peak (read recession) occurs when the change in GDP goes from being positive for a significant period to being negative for a significant period. So, it is the change in GDP that everyone cares about. But, reporting the change brings in a few statistical anomalies that are important.
This was a point I made in May in “Economic recovery and the perverse math of GDP reporting” when everyone was convinced the bottom was falling out, but I was predicting a fake recovery. It is the change in GDP that matters, not the absolute level. Well, the numbers work the same in both directions. And given the fact I see a double dip now as a baseline by early 2011, this makes Paul Krugman’s recent missive very much on point.
One thing that often becomes clear when we talk about prospects for next year — which worry me — is that there’s a lot of confusion over the timing of stimulus impacts. Even well-informed people will say things like “we’ve only spent a quarter of the money, so let’s wait and see what happens.” Menzie Chinn tried to get at this confusion recently; here’s my take.
Let me work with a stylized numerical example. It doesn’t quite match the real stimulus — there’s no distinction between spending and tax cuts, and it tails off much faster than the real thing. But I think it’s close enough to make the point. Here’s the table:
In the table, “Rate” is the total stimulus spending within each quarter. “Change” is the change in stimulus spending from the previous quarter. And “Cumulative is the total spending to date.
Translation: it’s irrelevant what percentage of the stimulus spending has already been spent. That is not how GDP is measured. It’s the quarter-on-quarter change in GDP that is relevant – and government stimulus subtracts from the change in GDP starting in Q3 2010 (see column two above).
This is why President Obama’s explanation for his recent turn toward deficit hawk is misguided. He said he wants to avoid a double dip recession, but clearly this is baked into the cake unless he increases spending and/or lowers taxes. What’s more is fiscal year 2011 for states and municipalities will go into effect at just that point – and with a huge deficit looming, that translates into another massive reduction in spending or a huge increase in taxes or both.
If the recent spectacle of government handouts to big Pharma and the banks via GSE mortgage market intervention give you that warm and fuzzy feeling about the efficacy of stimulus, then you’ll want to see some serious additional stimulus to prevent this coming train wreck. Otherwise, brace yourself for serious economic problems in the U.S. starting in the second-half of 2010 – just in time for the mid-term elections. And given already high levels of unemployment and fragile asset markets, expect serious carnage in both the real and financial economies.
Originally published at Credit Writedowns and reproduced here with the author’s permission.
4 Responses to “Double Dip Recession and the Perverse Math of GDP Reporting”
November 2010 elections likely will see the Democrats lose their majority. This will paralyze the Hill and leave lame the White House. Control of the country and its economy will be lost.
Bueller, Bueller…… Yeah that’s what I thought. Most don’t get it. The worst is yet to come. Just kick the can to the next generation. Soon the can will be empty or full of IOU’s or worse, there will be nothing left to kick.
Excellent post Edward. I must admit that (though I knew that about GDP reporting) I never really thought it through to this extent.Thanks
Unemployment insurance payments have been propping up consumer spending. Many states have borrowed money to prop up depleted UE Insurance funds.. States are in distress from shrinking tax receipts. There will come a day when consumer spending shrinks dramatically.Borrowing to maintain consumption might have made sense when the cause of the recession was due to inventory issues only but this time the recession is all about over indebtedness which caused inventory issues.If additional borrowing was to have had any long term positive effect on the system, it would have had to been directed at those who were carrying more debt than they could handle. Not at those who lent it to them… And not at levels just adequate to prop them up allowing them to barely maintain.As shown in the table above, current monetary policy is obviously just a prop that can not be maintained indefinitely. There will come a point where either interest on the new debt rises or debt is monetized or both. There will come a time when payments to those who can’t find a job will be affordable for states to continue. When that happens foreclosures will again rise and consumer spending will fall.The only way out of another decline IMO would be increased employment by for profit private enterprise. I don’t see that happening until consumers have adequately deleveraged and commodity prices, including energy, to have fallen adequately. Demand is always there, it is the ability to purchase at current prices, especially in housing, that has become way out of balance with after tax disposable incomes.