Real GDP rises 0.6%; not yet a recession

The Bureau of Economic Analysis released the advanced estimates of Gross Domestic Product (GDP). Real GDP increased by an annual rate of 0.596% over last quarter.

Whether or not we are in recession is under much debate. Particularly because a recession is often thought of as being 2 quarters of negative growth. The current anemic growth seems to indicate that we are not in a recession (although the figures will undergo revision).

The National Bureau of Economic Research (NBER) officially identifies the start and finish of recessions. Their definition of a recession is as follows:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Nouriel Roubini, an economics professor at New York University, gives six reasons why the positive 0.6% growth is deceptive. First he notes:

First of all, if you exclude the increase of inventory of unsold goods (that moved positive after a negative figure in Q4) the Final Sales of Domestic Product were a negative 0.2%. In other terms, inventories of unsold goods added an artificial 0.8% to Q1 growth boosting it from a negative 0.2% to a positive 0.6%. So actual aggregate demand (Final Sales of Domestic Product) – the actual measure of growth of true demand - fell in Q1. And this build-up of inventories in Q1 means that the fall in GDP in Q2 will be larger than otherwise as firms will have to reduce that large inventory of unsold goods via a further reduction in production and employment.

Here is a graph of Real GDP with and without changes in private inventories:

Barry Ritholtz talks about per capita GDP.

Merrill Lynch North American Chief Economist David Rosenberg points out a simple but overlooked fact about economic growth: The US population is expanding 1.0 - 1.5% per year. Any GDP growth of less than that means that on a per capita basis, we are contracting.

Here is a graph of per capita GDP:

I would argue that we have not yet had a "significant decline in economic activity." Recessions are easy to spot on the charts. Economic activity has slowed, yet it has not slowed as much as in other previous recessions. Unemployment is a good example. Unemployment has started to go up, but it has not moved up as much as in other recessions. The stock market is pricing in that the worst is over. If that were to be the case then we would have averted recession or it would be the smallest recessions ever.

This economic downturn is being led by the housing crisis which is still in its early stages. Foreclosures, delinquencies, and bank writeoffs are still accelerating. Housing prices are falling at its fastest pace ever. I fear that whether or not we are in a recession will soon no longer be in debate; it will be significant and obvious to all.

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