Author Archives: jfrankel

Revised GDP Statistics from the Commerce Department Illuminate the Recession

On July 31, the Department of Commerce’s BEA (Bureau of Economic Analysis) released an important set of numbers regarding GDP. Of most immediate interest, the advance estimate of GDP growth for the second quarter, April-June, 2009, was a very moderate -1 per cent per annum. The small magnitude of this negative number confirms an inflection point in the second quarter. As most of us had already thought, the economy is no longer in the free-fall of October 2008 to March 2009 — when the rate of output contraction was approximately 6% per annum – but, rather, is beginning to level out.

Furthermore, the figures reveal large depletion of inventories in the second quarter, which offers good grounds for hope that firms will begin to produce more in the second half of the year. In other words, the economy is probably bottoming out even as we speak.

But even if it turns out that the NBER Business Cycle Dating Committee eventually puts the trough sometime in the 2nd half of 2009, it will not make that decision until all the facts are in, which will be a long time. A major reason is that government statistics, especially for GDP, are always revised subsequently. That brings us to the other big component of the BEA release on Friday: comprehensive revisions to the GDP numbers going back many years. The BEA does a comprehensive revision generally every five years. In this case the statistics were substantially affected, especially those over the last dozen years, as the results of a number of permanent changes in methodology (such as how natural disasters are treated in the accounts).

These revisions produced two interesting implications for the current recession, quite aside from the question whether it is now ending.

First, the recession turns out to have been worse than the previous GDP numbers indicated. During the course of 2008, the economy apparently contracted 1.9%, more than double the previous estimate of 0.8%. The cumulative decline through the 2009 Q-I now appears to have been 2.8% (as compared to the previously reported 1.8%). Add in the latest quarter, and the 3% cumulative decline cements the claim of this recession to be the worst since the 1930s.

Second, that revision includes a conversion of the +0.9% that was previously reported for the first quarter of 2008 to the new estimate for that quarter: -0.7%.

That is important from the viewpoint of the NBER Business Cycle Dating Committee. Why? All through 2008 it was difficult to tell whether a recession had started at the end of 2007. On the one hand, some measures such as employment and real income had peaked then, but on the other hand it appeared that GDP had continued to grow in early 2008. Even after the accelerated deterioration in the autumn of 2008, when it could no longer be doubted that the economy was in recession, the signals as to the date of its beginning still conflicted.

The Committee ended up, on December 1, 2008, declaring that the peak had occurred in December 2007. As always, there were critics. Some didn’t see how we could declare that a recession had begun six months before GDP growth turned negative. “Everybody knows that a recession is defined as two consecutive negative quarters” (More common, as usual, was the precisely opposite critique: “The NBER is just now saying what has long been obvious to everyone but them.”)

The new report from the BEA that the first quarter of 2008 was negative after all is thus another piece of evidence that validates the choice of end-2007 as the business cycle peak. Similarly, it validates the decision by the Committee to have made the call in December, rather than waiting for the BEA revisions of July 31, 2009.

The bottom line of all of this? We are less at sea than we had feared. The data now tell a story that is fairly well delineated, the story of a recession that, though upsettingly severe in amplitude, appears familiarly sinusoidal in shape.

(This post does not necessarily represent the views of the NBER Business Cycle Dating Committee or its members. Nor of the BEA or its Advisory Committee members.)

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I 06 II 06 III 06 IV 06 I 07 II 07 III 07 IV 07 I 08 II 08 III 08 IV 08 I 09
Newly reported GDP 5.4 1.4 .1 3.0 1.2 3.2 3.6 2.1 -.7 1.5 -2.7 -5.4 -6.4 read more

An Answer for the Roadblock to an International Climate Change Agreement

On her visit to India two days ago, Secretary of State Hillary Clinton was publicly rebuffed when she raised the problem of global climate change. The Indian environment minister declared “we are simply not in the position to take legally binding emissions targets.”

No single country can address this problem on its own. Hence the international negotiations that will take place in Copenhagen in December to try to find a successor treaty to the Kyoto Protocol. But the international effort has run into a seemingly insurmountable roadblock. On the one hand, the US Congress is clear: it will not impose quantitative limits on US emissions of greenhouse gases if China, India, and other developing countries don’t impose quantitative limits on theirs. Indeed, that is why the Senate was unwilling to ratify the Kyoto Protocol ten years ago. The logic seems completely reasonable: why should US firms bear the economic cost of cutting emissions if carbon-intensive activities would just migrate to countries without caps and global emissions continue their rapid rise? On the other hand, the leaders of India and China are just as clear: they are unalterably opposed to cutting emissions until after the United States and other rich countries go first. And why should they? The industrialized countries created the problem of global warming, in the process of getting rich; the poor countries should not be denied their turn at economic development. As the Indians point out, Americans emit more than ten times as much carbon dioxide per person. read more

A Return to Saving?

“Is the recent Return to Saving temporary or permanent?” asks the National Journal .

The famous Paradox of Thrift holds now more than ever: what is good for the individual, and for the economy in the long run — high saving — is bad for the economy in the short run. During the current worst-post-30s recession we need a boost to demand. In the longer run we need more saving.

Americans could not have gotten the timing worse. During the three expansions of 1983-2007 the economy grew well, and by the end of the period the first baby boomers had reached their peak earning years. Yet households’ saving rates declined, falling almost to zero in 2005-07. Meanwhile, the government ran record deficits, reducing national saving even more (in the 1980s and 2000s; the late 1990s saw surpluses). It is ironic that the pro-capital orientation to the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 was largely sold as an incentive to increase saving and investment, and yet household saving fell sharply subsequent to both policy changes — to say nothing of national saving. The increase in the after-tax return to saving did not lead to a “return to saving.” read more

Jeffrey Frankel's Blog

Views on the Economy and the World