Friday, July 31, 2009

U.S. Recession Worse Than Previously Estimated

Today the advance second quarter GDP estimate was released. Perhaps more interesting, especially since that advance estimate will be revised at least half a dozen times, was the annual revision of previous numbers. I have previously noted that these annual revisions systematically revise down previous estimates (on average, a few individual quarters are in some cases revised up). That was the case this time too, though an extra twist for numbers released this time was included. More on that below.

Before I get to the revisions, I should briefly comment on the second quarter number. It showed that the second derivative was indeed positive, although the first derivative remained negative, or in other words that output continued to contract, but at a slower pace. Just how dramatic this slowdown was depends on whether you focus on the headline volume number or my preferred terms of trade adjusted number. The headline volume number was -1.0% compared to a downwardly revised -6.4% in the first quarter. But because terms of trade deteriorated in the second quarter after having significantly improved in the first quarter, the terms of trade adjusted was a lot smaller, from -3.1% in the first quarter to -1.5% in the second quarter.

Moreover, most of the improvement didn't reflect any improvement in the private sector, but increased government purchases. So if you look at the details, you can see that most of the apparent improvement reflects increased inflation and government spending, rather than any real private sector recovery.

The revisions of previous quarters show, as did all the previous annual revisions, significant downward revisions of numbers released previous quarters. Although a few quarters were upwardly revised (most notably Q4 2007, which was revised from -0.2% to 2.1% in volume terms (In terms of trade adjusted terms it was revised up somewhat less, from -1.6% to -0.1%)), most quarters were revised down. This was particularly true between Q1 2008 and Q3 2008, where (in volume terms) it was revised down from 0.9%, 2.8% and -0.5% to -0.7%, 1.5% and -2,7% respectively (In terms of trade adjusted terms it was revised down from 0.0%, -0.1% and -1.1% to -2.2%, -0.6% and -3.0% respectively).

After these revisions, this recession is now both the deepest and the longest since the 1930s.

Because this report also revised the annual benchmark from 2000 to 2005, even older numbers were also revised. These revisions were actually mostly positive unlike those for 2007-08. The upward revision was mostly for the years of 1998 to 2002, where GDP was upwardly revised by a total of 1.4%. If these new numbers are to be believed then the 2001 recession was even more shallow than we previously thought and the 1990s boom even greater. But this greater success was only achieved at the price of a greater crisis now.


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