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
Great piece by Martin Feldstein in the FT: Misleading growth statistics give false comfort
"Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is “sliding into a recession.”
"This is a weakening economy,” Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. “If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down.”
The comments by Feldstein, a Republican, go farther than anyone in the Bush administration has gone in publicly characterizing the severity of the U.S. slowdown. Treasury Secretary Henry Paulson in an interview last week said the economy is “still growing, albeit modestly.”
Misleading growth statistics give false comfort
FT, May 7 2008 18:54
Feldstein Says U.S. Economy `Sliding’ Into Recession
Anthony Massucci and Kathleen Hays
Bloomberg, May 6 2008