Thursday, October 30, 2008

First Leg of a Recession?

According to the National Bureau of Economic Research, 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."

Generally, two consecutive quarters of negative growth in GDP is accepted as a recession. Today, the Bureau of Economic Analysis announced their advance estimate of 3rd quarter GDP growth: -0.3%. The bulk of this decline was due to falling personal consumption expenditures.

This comes on the heels of 2.8% growth in the 2nd quarter. Since 2006:

- 4th occurrence of growth less than 1%

- 2nd occurrence of negative growth

GDP is interpreted as a trailing indicator, so let's see if there any components that will tell us if there any bumps down the road instead of in the past:

- Gross private domestic investment totaled $1.694 trillion, down from $1.839 trillion in the 3rd quarter of 2007

- Quarterly Government expenditures have increased by $49 billion over the last 2 quarters

I would also like to point out the GDP Deflator. According to the last 3 reports, prices are increasing at an annualized rate of 2.66%. Not including the recent drop in gasoline prices, does it really seem that prices are only up 2.66% this year?

If the Deflator underestimates the actual level of price increases, it serves to inflate GDP.

Note: Today's report is the first of three reports that the BEA releases on quarterly GDP. Each report is revised and fine tuned. The next report is the preliminary release, followed by the final release.

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