Wednesday, April 29, 2009

Economy DID NOT shrink by 6.1%

I was getting rather ticked off with media reports that the US economy shrank by 6.1 percent.
The 6.1 number is correct--but that is an annualized rate. It is a good thing I came across David Leonhardt's blog post, which means I don't have to re-create a post, but can copy/paste from his:
the official numbers describe the annualized rate of decline. The economy didn’t actually shrink 6.1 percent in the fourth quarter, despite what the government reported. It shrank at a rate that, were it to continue for a full year, would cause the economy to be 6.1 percent smaller at the end of that year.
Leonhardt does point out why this economic contraction is worrisome:

Here are the worst six-month declines in economic activity since 1947:

3rd quarter, 1957 - 1st quarter, 1958: -3.7 percent
3rd quarter, 2008 - 1st quarter, 2009: -3.2 percent
3rd quarter, 1981 - 1st quarter, 1982: -2.9 percent
1st quarter, 1980 - 3rd quarter, 1980: -2.2 percent
2nd quarter, 1953 - 4th quarter, 1953: -2.2 percent
The irony? Despite this news, and all the hoopla over the swine flu pandemic, the stock market was up.

According to Bloomberg:
“Most people are saying we could bottom out in the second half of the year, maybe in the third quarter, and then see positive growth again,” Christina Romer, the White House’s chief economist, said in a Bloomberg Television interview. “We’re certainly looking for some positive news towards the end of the year.”
The Economist notes on the other news item about a rise in consumer confidence:
confidence is a fragile thing and can be undermined by random events (such as swine flu). It is also worth remembering that consumers have had two tremendous boosts to their pocket books in the form of lower oil prices and lower mortgage rates. Even those aids to sentiment have only lifted the confidence index by 14 points compared with the 86 point decline it previously suffered (according to Capital Economics).

I would like to see consumer confidence survive the test of some really bad news (like a major corporate bankruptcy) before I was confident that the bottom had been reached. After all, from here, rates can't be cut any further, wages won't go up much, unemployment has further to rise and taxes will eventually have to go up. Not the sort of environment to make most people rush out and buy a flat sceen TV.

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