If you went no further than noticing that the q/q annualized growth rate of -0.3% was faster than the -0.5 in the Bloomberg consensus, you might have taken this as good news. I’m not going to say it wasn’t good news (relatively speaking), although negative growth makes the case for recession pretty good according to Jeff Frankel (who is on the NBER BCDC); see also RealTime Economics. However, there are some pretty interesting things that merit additional discussion.
I think that most observers will concur with assertion that the -3.1% decline in consumption q/q annualized was the most important aspect, as highlighted in Jim’s post. To place the consumption drop in perspective, consider the q/q changes in GDP and consumption over the last forty years. The last time consumption growth went negative was in the 1990-91 recession. Figure 1 show the growth rates (not contributions to GDP).
Figure 1: Quarter-on-quarter annualized growth rates of real GDP (blue) and consumption (red), calculated as log-differences. NBER defined recession dates shaded gray. Source: BEA, NIPA release of 30 October 2008, NBER, and author’s calculations.
What is the composition of this consumption decline? Figure 2 shows the contribution of each consumption aggregate to GDP growth. It’s apparent that the consumption decline is widespread, spanning all categories. Durables I expected to decline, given the procyclicality of consumer durable expenditures. The decline in services and nondurables, however, signals either more binding credit constraints, a downward revision in permanent income, or both.
Figure 2: Consumption contribution to GDP growth (tan bars), durables contribution (red), non-durables contribution (green) and services contribution (teal), in percentage points. NBER defined recession dates shaded gray. Source: BEA, NIPA release of 30 October 2008 and NBER.
Returning to overall growth, I have two observations that pertain to growth prospects. The first is that exports are accounting for a smaller proportion of overall growth — and no longer sufficient to keep growth positive, obviously. With the slowdown going global , there will be even less support from this channel. I’ll also add a speculative note; it might be the case that the credit crunch impacted negatively international trade, in particular exports, in September, and even more substantially going forward . We’ll find out more in a couple weeks when the September trade figures are released. Second, government spending is the single largest aggregate category in GDP growth, at 1.15 percentage points of the -0.3 percentage points total.
Figure 3: GDP growth (blue bars), exports contribution (red), and government contribution (teal), in percentage points. NBER defined recession dates shaded gray. Source: BEA, NIPA release of 30 October 2008 and NBER.
Figure 4 illustrates the breakdown of contributions from government spending.
Figure 4: Government contribution to GDP growth (green bars), Federal nondefense contribution (blue), Federal defense contribution (red) and State and Local contribution (purple), in percentage points. NBER defined recession dates shaded gray. Source: BEA, NIPA release of 30 October 2008 and NBER.
In the government sector, defense is providing the bulk of the growth: 0.86 ppts of overall growth. It would be interesting to find out what this spending is on. Another observation is that state and local spending is accounting for a smaller share of growth. This reflects the increasingly binding constraints on spending imposed by declining tax revenues — validating the assertion I made in this post several months ago about the inability of state and local spending to maintain growth.
A couple of the requisite caveats. Justin Fox reminds us that the deflators — particularly consumption deflators — appear a bit dubious. Revisions in the deflators will induce revisions to real magnitudes.
Looking further ahead, Nouriel Roubini argued in today’s JEC panel that when the final final revision of the GDP data is in, negative growth will have started at end-2007 as the 08H1 data are revised downward. To me, a pretty plausible possibility, given the data revisions that occurred around the last recession. , .
In any case, no reason to modify the view that this particular recession will be very deep, reinforcing the case for effective fiscal stimulus.
See also: WSJ.