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Friday, February 27, 2009

Economists React: from WSJ blog on todays GDP dismal numbers

February 27, 2009, 11:34 am
Economy ‘Slipping Fast’
Economists and others weigh in on the larger than expected downward revision to fourth-quarter GDP.

Finally the GDP data have caught up to the severity of the recession and, unfortunately, we expect the first quarter report to show similar weakness to the fourth quarter, although with a more significant liquidation of inventories. With the lone exception of government spending, every component of demand contracted in the fourth quarter and the economy shrank at a more rapid rate than any quarter since the first quarter of 1982. Alas, we are looking at what is almost certain to be the longest, and quite likely to be the deepest, recession of the post-war era. That said, we still look for a bottom in the recession in the second half of the year as consumers complete their adjustment to a higher savings rate, some modest fiscal stimulus kicks in, and the dynamics of inventory liquidation and reductions in housing construction burn out. However, we agree with Bernanke’s assessment that recovery will only occur once the financial system has been stabilized –RDQ Economics

The recently enacted $787 billion stimulus package will have virtually no impact on growth in the first half of this year, but will help to turn the economy around by the second half. Even then, the best we can hope for is an average growth rate of around 0% in the third and fourth quarters — with a small contraction in the third quarter followed by weak positive growth in the fourth quarter. Bottom line: we are in the midst of the worst recession in the post-war period, even factoring in the massive stimulus program. –Nariman Behravesh, IHS Global Insight

The surprise was a bigger than anticipated downward revision to consumption. Based on the retail sales figures, we had expected a marginal downward adjustment, but the revision was substantial, to a disastrous -4.3% from -3.5%. According to the BEA, the downside reflected new data on gasoline and natural gas demand. Coming on top of a 3.8% fall in the third quarter, this marked the second worst two-quarter performance in the post-war period, and the only worse two quarter showing, in 1980, was almost entirely concentrated in one of the two quarters. We’ve never before seen two straight quarters in which consumption declined near 4% annualized. –Ted Wieseman, Morgan Stanley

The fact that inventories were revised down between the advance and preliminary report is a positive, as it implies somewhat less of an inventory drag in the first half. The downward revision to fourth quarter real consumption could imply a worse trajectory for first quarter consumption, but it is hard to know for sure because we do not know how the revisions were spaced throughout the quarter. –Abiel Reinhart, J.P. Morgan

There will no doubt be those who see the significant markdown in private nonfarm inventories relative to the BEA’s advance estimate as a positive sign that foreshadows a smaller contraction in real GDP during the current quarter. Unfortunately, this will not be the case. Given the steep contraction in business and household spending, firms are still sitting on more inventory than they desire, and additional cuts in production are in order. We liken this situation to the current state of homebuilders who, as we have pointed out on many occasions, are chasing a moving target, i.e., falling sales, on the way down. In other words, even though they have slashed production of new homes, an ever-falling sales rate is making it difficult for them to catch up and induces deeper cuts in production. This is in essence now the situation the broader economy finds itself in. –Richard F. Moody, Mission Residential

The new headline GDP number is closer to our estimates from the latter part of last year, not that this is much comfort. The drop in inventories means there is less of an inventory rundown ahead, other things equal, but the effect is marginal. Everything else looks grim and we think the first quarter will not be much better. –Ian Shepherdson, High Frequency Economics

The decline in GDP in the fourth quarter was the largest since 1982 and the fourth largest in post-war US history. But perhaps the most surprising thing about it is how commonplace it looks in the current global environment: Fourth quarter Real GDP declined by 5.8% in the Euro area, 6.0% in the UK and 12.7% in Japan. Many emerging markets also experienced double-digit declines during the quarter. –Zach Pandl, Nomura Global Economics

The pattern of revisionand the flow of data so far in the first quarter point to an economy that entered the new-year on a very weak track, and that has continued to slip fast. Combined with the extremely weak fourth quarter, the contraction in the six-month period covered by the fourth and first quarters GDP could well be the worst such period in the postwar era, beating out fourth quarter of 1981 and second quarter of 1982. Some improvement is likely after that, as the fiscal stimulus starts to kick in. –Goldman Sachs

Economic activity plunged in the fourth quarter, the result of sharp declines in consumer and capital spending on top of a very weak housing market. Although consumer spending will not drop as rapidly in the first quarter, both capital spending, residential investment, and inventory investment will likely decline just as faster or even faster. –Stephen A. Wood, Insight Economics

The outlook for the first quarter and beyond remains dim , dominated by a tapped-out consumer, ongoing weakness in housing, and a downturn in capital spending that promises to gain momentum. Partly blunting the decline will be a narrowing of the net export deficit and surging federal government spending. However, states and localities are busy slashing spending to try to balance budgets that are hemorrhaging red ink, so this will partly offset the federal government’s upward impetus. All in all, we continue to look for a recession that is both longer and deeper than those in recent memory, persisting at least through the entirety of this year and into the early part of 2010. –Joshua Shapiro, MFR Inc.

Compiled by Phil Izzo

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