The Bureau of Economic Analysis reported today that U.S. real GDP fell at a 3.8% annual rate in the fourth quarter of 2008.
A -3.8% annual growth rate was a bit better than the consensus forecast of -5.4%, but no cause for cheer there. The discrepancy is entirely accounted for by inventory accumulation, which contributed +1.3% to the 2008:Q4 figure. Production (which is what GDP measures) was bigger than sales, as a result of which inventories piled up. Real final sales were down about 5.1%, close to the consensus expectation.
Housing subtracted 0.85% from the 2008:Q4 growth rate, but no surprise there– it’s been doing that much, and then some, for three years now. The decline in broader consumption spending exerted a much bigger drag, as it had last quarter. Also in the fourth quarter nonresidential fixed investment– most importantly, spending on equipment and software– joined the party, or perhaps I should say party-pooping. There was an impressive collapse in both exports and imports. From the point of view of GDP (which is based on exports minus imports), those combined to a wash. But from a broader economic perspective, plunging imports and exports could be very worrisome, because it signals that the downturn is very much global, and that a key engine that has driven rising living standards for everyone in the world– efficiency gains from trade– may be stalling out.
On the other hand, today’s number does not mean that the real value of goods and services produced in the U.S. fell by 3.8% in the fourth quarter. The American convention is to report these numbers as annual rates, so that the actual drop within the quarter was only 1/4 the headline number. In fact, the level of U.S. real GDP in the fourth quarter of 2008 was only 0.2% lower than it had been in 2007:Q3, before the current recession began.
Although the cumulative decline so far has been relatively modest, the 2008:Q4 quarterly drop is bigger than anything seen in the previous two recessions, and puts it among the dozen worst quarters on record since World War II.
The number is also sufficiently dramatic to eliminate any question that the economy was in recession in 2008:Q3, pushing the Econbrowser Recession Indicator Index to 88.4%. This is a characterization, using data as now reported through 2008:Q4, of the state of the economy as of 2008:Q3. A value above 67% is enough to trigger a call that the economy was in recession as of the third quarter of last year.
The basis for the index is described here. The index by definition is a real-time assessment that is never revised and is used automatically to generate declarations (also never to be revised) that a recession has started or ended. When the signal for a turning point is triggered, as the current value has just done, our approach is to use the full sample of currently available revised data as of that date to make a simultaneous declaration as to when the recession most likely began. The current full-sample smoothed inferences (whose calculation is described here) are summarized in the table at the right. There is not a very sharp demarcation in choice of the date, though following our previously announced procedure, we date the recession as beginning in the first quarter for which the revised index is above 50%. That rule causes us to announce today that the current U.S. recession began in 2007:Q4.
This announcement turns out to be exactly the same final determination as that made by the NBER Business Cycle Dating Committee, which the NBER announced on December 1, 2008. Based on simulated historical performance, the expectation is that our dates will be very similar if not identical to the NBER dates, and will sometimes be announced after the NBER announcements (as proved to be the case this time), but sometimes announced considerably sooner. Unlike the NBER dates, our dates are arrived at by an entirely mechanical, quantitative algorithm.
We will declare the recession to be over when the index falls below 33%.