Sunday, May 4, 2008

So which is it? A recession or a slowdown? And what is the GDP exactly?

That's a lot of questions for a Sunday morning, hypothetical question asker.

Lemme 'splain.

The news media are making a fuss about whether or not Bush will say the word "recession", which is being thrown around by a lot of people right now. He's said "slowdown" and "downturn" and several other such words, but not the R-word so far.

Technically, he's right to wait. When it's happening, the official start of a recession is two quarters in a row of negative growth in the GDP. Fourth Quarter of 2007 has its final measure in, and the number was 0.6% growth. The first estimate of First Quarter 2008 is also at 0.6%. Adjectives I've seen thrown around for this level of growth include "paltry", "anemic" and "pathetic", but not "negative". So officially, not a recession yet.

Unofficially, using numbers from other sources or using past knowledge to explain the present, it may very well be a recession. I nicked the chart above from the Shadow Government Statistics website. Orange is the official GDP numbers. Blue is the way John Williams, the guy who runs the website, measures the GDP. The big difference involves the way the government reports (or more accurately, underreports) inflation. I took another chart of his and checked to see how accurate the official inflation rate and the SGS rate is, checking the price increases on two things whose 1980 price I remember, gas and rent in Sunnyvale, California. The official rate is considerably too low, but the SGS rate is considerably too high.

That said, we can see that the last time the orange graph dipped below the 0% line was in the early nineties. But now it is generally acknowledged there was a recession at the end of the Clinton era and the beginning of the current administration, usually attributed to the dot com bubble bursting. But notice that the official GDP measure never sunk under 0% at the time, but only went down to the "anemic" or "sluggish" levels of growth, not unlike what we see today. One advantage of the blue graph measure is that it acknowledges that recession everyone agrees happened in hindsight, and says we are currently in a shallow recession that looks ready to get worse.

But what exactly is the GDP? How is it measured? I went to wikipedia and some other websites, and here is what I gleaned.

GDP = consumption + gross investment + government spending + (exports - imports)

Consumption: That's us folks spending. Yay, shopping! At least some kinds of shopping.

Gross investment: That's business buying stuff, not the stock market or bonds or putting money into savings. I'm not sure if buying gold or silver counts, but since you get something you can hold in your hand, I'm guessing yes, it counts.

Government spending: Not all government spending counts. Anything where the government doesn't get goods or services for the money they hand out is a transfer payment, and does not count towards GDP. Social Security and unemployment benefits are transfer payments. Those happy $600 checks we will see are transfer payments, so not counted as part of the GDP, at least not until we spend them. (Again, yay, shopping!) On the other hand, since I have a gummint job, my paycheck from the community college counts as GDP once when it is given to me, and yet again when I spend it on the rent.

Matty Boy, GDP superhero!

The money we spend on weapons definitely counts as GDP. I'm not sure if the salaries of American government employees working abroad, whether soldiers or diplomats or contractors, counts as GDP. Still, Iraq and Afghanistan are adding to our GDP, and every time we blow stuff up, we need new fresh weapons to replace the ones we just used.

Exports - Imports: Like I said earlier, yay, some kinds of shopping. When we buy stuff from overseas, the money we spend goes into the GDP, but then gets subtracted out, except for whatever mark-up the store makes on the purchase. The $600 we all will get this year will not add to GDP when the gummint gives us the checks, and if we buy some cool new electronics or fancy clothes or anything else made overseas with it, that won't help the GDP much either, except for the profit the store makes. On the other hand, if you spend the money on $600 worth of Coca-Cola or Budweiser, then that's 100% counting towards the GDP.

It's the patriotic thing to do.


What makes this downturn/recession/depression/whatever worse than the one from the end of last decade is how much of the weak growth we see right now is based on money no one has earned yet. Both government indebtedness and personal indebtedness are crazy high right now, and the pain of the housing crunch is much more widespread than the pain of the dot com bust ever was.

From the philosophy of science point of view, the GDP is a single number, and no single number claiming to give a good explanation of a complex system can ever be trusted completely, much in the same way that IQ can't possibly be measuring the very complex thing that is human intelligence with a single number. One number is one dimensional, and a multi-dimensional thing has to be measured accurately with many numbers. The American economy is huge, and some parts of it are doing better than ever. Though much of our oil is imported, and we are paying prices never seen before in history for crude oil even when adjusted for inflation, the gas refining process is part of the GDP, and those companies are showing record profits. Sadly, some parts of their success are in effectively zero-sum games, so the oil industry's win is the airline industry's loss, just to take one example.

Whatever we decide to call this economic situation, and no one calls it a boom time, we appear to be in the middle of it, and probably closer to the beginning than we are to the end.

Dress accordingly.


FranIAm said...

As you say..."What makes this downturn/recession/depression/whatever worse than the one from the end of last decade is how much of the weak growth we see right now is based on money no one has earned yet."

Money that no one has earned yet.

I ascared Matty, I ascared.

Anonymous said...

During the recession of 2001, we did not see two consecutive quarters of negative GDP growth.

But, leading into and through the recession of 2001, 3 out of 5 quarters showed negative GDP growth:

Learn more here:

The Recession of 2008 That Wasn’t?

Matty Boy said...

Thanks for the pointer. The government numbers dealing with the current situation are very informative.

dguzman said...

So when do we get to the point where it costs too much to drive to work so we are forced to quit our commuter jobs and work close to home, which means we're all working at the local corner store or B&N/Starbucks? And when do we get to the point where we eating each other's dead bodies to survive?

Oh wait--that's probably not until there's a democrat in the White House to blame it on.