Slowly mov­ing for­ward

The Washington Times Weekly - - Editorials -

The econ­omy con­tin­ued to limp for­ward dur­ing the first quar­ter, ac­cord­ing to the Com­merce De­part­ment’s “ad­vance” re­port on gross do­mes­tic prod­uct (GDP), which in­creased at an an­nual rate of 0.6 per­cent in the Jan­uary-March pe­riod. That growth rate was iden­ti­cal to the slow pace ex­pe­ri­enced dur­ing the fourth quar­ter.

How­ever, based on a re­lated mea­sure of eco­nomic ac­tiv­ity — fi­nal sales of do­mes­tic prod­uct, which deducts the change in private in­ven­to­ries from GDP — the econ­omy per­formed sig­nif­i­cantly worse dur­ing the first quar­ter. Fi­nal sales fell by 0.2 per­cent in the first quar­ter af­ter ris­ing by 2.4 per­cent dur­ing the fourth quar­ter. While the Com­merce De­part­ment re­ported that the an­nu­al­ized in­crease in GDP dur­ing the first quar­ter was $17 bil­lion (mea­sured in con­stant 2000 dol­lars), more than 100 per­cent of that in­crease re­lated to the net change in private in­ven­to­ries ($20 bil­lion), which was equiv­a­lent to 0.8 per­cent of GDP. Thus, re­mov­ing the change in in­ven­to­ries from GDP turns a GDP growth rate of 0.6 per­cent into a de­cline of 0.2 per­cent for fi­nal sales.

If the in­crease in in­ven­to­ries was un­in­tended, as it ap­peared to be, then firms will likely re­duce their out­put dur­ing the cur­rent quar­ter in or­der to re­turn their in­ven­to­ries back to de­sired (lower) lev­els. Per­sonal con­sump­tion ex­pen­di­tures, which have formed the back­bone of the latest eco­nomic ex­pan­sion, in­creased by only 1 per­cent dur­ing the first quar­ter. Mean­while, busi­ness in­vest­ment de­clined, fall­ing by 2.4 per­cent.

Con­trary to pop­u­lar be­lief, a re­ces­sion is not de­fined by at least two con­sec­u­tive quar­ters of neg­a­tive GDP growth. In­deed, the eight-month re­ces­sion in 2001 did not in­clude two con­sec­u­tive quar­ters of de­clin­ing GDP. In fact, the Busi­ness Cy­cle Dat­ing Com­mit­tee of the Na­tional Bureau of Eco­nomic Re­search (NBER) de­fines a re­ces­sion as “a sig­nif­i­cant de­cline in eco­nomic ac­tiv­ity spread across the econ­omy, last­ing more than a few months, vis­i­ble in in­dus­trial pro­duc­tion, em­ploy­ment, real in­come and whole­sale-re­tail trade.” So, the fact that GDP most likely in­creased dur­ing the first quar­ter does not pre­clude the on­set of a re­ces­sion.

Al­though the 2001 re­ces­sion of­fi­cially be­gan in March, the NBER did not de­clare that a re­ces­sion had be­gun un­til late Novem­ber, which, it later turned out, marked the end of the 2001 re­ces­sion and the be­gin­ning of the latest ex­pan­sion. If the econ­omy no­tice­ably de­te­ri­o­rates over the next few months then the NBER will face a dif­fi­cult sit­u­a­tion. Will its Busi­ness Cy­cle Dat­ing Com­mit­tee be in­clined to make a de­ter­mi­na­tion in Septem­ber or Oc­to­ber, dur­ing the heat of the pres­i­den­tial and con­gres­sional cam­paigns, that the econ­omy of­fi­cially en­tered a re­ces­sion ear­lier this year?

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