Monday, May 12, 2008

Frankel rebuffs White House' call on slowdown not recession

Jeff Frankel thinks by stating that the economy is not in recession but in slowdown, White House CEA Chairman Ed Lazear risks putting his reputation on the line.

It is true that the Commerce Department BEA's advanced estimate of first-quarter GDP growth was still above zero (+0.6%).     But there are three reasons not to take this number too seriously.

(1) Revisions in these numbers are usually substantial, so the final number could easily turn out to be negative — or twice as high. (my comment: revision is esp. high around turning point)

(2) Even if the +0.6% number were to hold up, it can be entirely accounted for by measured inventory investment.   In other words, real final demand fell rather than rose in the first quarter.   It is plain that this inventory accumulation was not the outcome of deliberate decisions by bullish firms to add to their inventories in anticipation of a booming economy.   Rather it was almost certainly unintended inventory accumulation, as goods sat unsold on store shelves and in warehouses.    This overhang makes it more likely that inventory accumulation will be negative in the 2nd quarter.   (Admittedly, rising exports from the weak dollar and rising consumption from the tax rebate checks could outweigh that particular factor, and we could scrape along the ground for another quarter at near-zero growth).

(3) As Martin Feldstein has been pointing out, it is a misinterpretation of the GDP statistics to say that growth remained positive in the first quarter.  Rather GDP for QI as a whole was estimated to have been 0.6% higher as compared to QIV as a whole.  The Commerce Department does not report monthly GDP estimates, but MacroAdvisers does, and these data suggest that monthly GDP has been declining since January.