graphic courtesy of Shadow Government Statistics
This is why its so important to accurately report economic data for policy makers:
In theory, the Fed (looking at that blue line) could have both cut sooner where appropriate and raised rates sooner when signs of inflation became apparent. Instead, they relied on modeled data that was faulty. Hence, our current situation.
UPDATE: May 8, 2008 4:08pm
Angry bear states that SGS’ GDP estimates radically understate growth, and I do not totally disagree with his assessment.
The SGS data is an extreme measure of inflation and growth, and I am not suggesting that model is perfect, or even very precise. However, we do know that BLS tends to go the opposite way, understating inflation and overstating growth. Reality likely lies somewhere in between the two — real GDP growth in the 1980s and 90s, punctuated by the 1990 and 2001 recessions.
I have been arguing that the growth this cycle was significantly inflated. The Economy was reflated with cheap cash and plenty of credit. Hence, the overstatement of growth (and its more of a knock on the Fed Chief at the time than the President.
Yesterday, I wrote: “David Leonhardt’s NYT columns are oftentimes insightful and illuminating. Unfortunately, today’s column is not one of those times . . .” I promised readers (and David) an explanation. Consider this it. First off, I interpreted Leonhardt’s column as really two distinct issues — one psychological, one statistical. He got the first one…Read More
Click for Video
Federal Reserve Chairman Ben S.
Bernanke, seeking to end the worst housing slump in 25 years,
urged the government and mortgage lenders to intensify their
efforts to avoid home foreclosures.
Bernanke, in a speech in New York today, also reiterated his
call for lenders to forgive portions of mortgages for some
struggling homeowners. He said proposals should be “tightly
targeted” at borrowers at greatest risk of losing their
properties, and avoid providing an incentive for defaults.
The Fed chief also backed the idea of having the Federal
Housing Administration refinance troubled mortgages, a concept
included in Democratic legislation in Congress, without
explicitly endorsing the bill. His remarks indicate a gap with
the Bush administration, which has preferred to rely on industry-
"Realistic public- and private-sector policies must take
into account the fact that traditional foreclosure-avoidance
strategies may not always work well in the current environment,”
Bernanke said in remarks to a Columbia Business School dinner.
Bernanke Urges Action to Avert Further Foreclosures
Scott Lanman and Alison Vekshin
Bloomberg, May 5 2008
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
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.
Leading Quarter of 6 Post WWII Recessions, GDP