Economic Calendar May Reveal Recession's Birth
A: On April 30th, we get the Q1 Advance GDP data. The NBER generally defines a recession as two consecutive quarters of declining GDP; although there are many arguments how a recession should be defined. Many believe that Q1 GDP will be the final nail in the coffin to define when the recession officially started. If you recall, Q4 GDP came in at 0.6%, down sharply from a 4.9% growth reading registered in the previous quarter. We need to see how this is revised down the road, and whether the NBER declares a recession starting in late 2007, or early-to-mid 2008. It's very hard to imagine us avoiding one.
Due to the almost 10 month old credit crisis so far, a recession almost feels expected at this point. It shouldn't scare anyone and is a healthy process to ensure longer term sustainable economic growth; it cleanses the system! So, when next week comes around and we get the first glimpse at how the Q1 GDP number is, it really is a matter of how slow we were in the months of JAN - MARCH. 
Consensus calls for a range between 0.4% - 0.7%; with the key number being 0.6% from the previous quarter. In my opinion, we can easily go to 0% growth, and possibly a bit negative for Q1 GDP. Chart on the right courtesy of The Big Picture (via Econoday)
Now, if the number comes in below Q4's 0.6%, the media will start the recession story and headlines will be everywhere. Depending on how low the number is, I wouldn't expect it to cause that much of a headline shock for buyers in general because we have been thrown into a credit fire storm for months and came out a bit tougher because of it; I mean we lived to see a Bear get shot & killed. Call it the teflon effect if you will. It doesn't mean that consumers will go nuts spending again or that buyers will start bidding over ask for Manhattan real estate; it simply means that the psychological effect likely will be muted and not one of surprise & shock!
In a recession, corporations cut costs in any way possible to adapt to the slowing economy. With brokerages & banks at the epicenter of the storm, we know that job losses will mount over the coming quarters; we are at about 35,000 right now and that is expected to rise to about 100,000 by this time next year. So, for the next two quarters we should see pressure on GDP as the result of the credit hurricane and the lack of available credit/higher costs for consumers and small businesses. After that, you will start to see the effects of Fed policy and the $168 billion stimulus package that sends out checks to tax payers in June. Clearly, the gov't passed this stimulus package to, drum roll please, you guessed it...STIMULATE the economy! The hope is that Americans take their free money and go shopping for goods and services! Not me though, that money will wisely go towards paying off my highest costing credit card's! I apologize for not playing the game that I am supposed to play to stimulate the American economy; but to me, we are not out of the woods yet so stimulus money = debt paying money!!
Comments (11)
I'm confused - I thought a recession is defined as the actual GDP being negative, not that the growth in the GDP slows down? That is, 0.6% means Q4 was decidedly not a recession (by dictionary definition terms) and Q1 can only start it if the number is negative? That if its 0.5%, it means we narrowly escaped yet again?
Posted by Steve | April 22, 2008 10:18 AM
Steve - there are varying definitions but the newspaper definition, which is what I am using because of headline phenomenon if it occurs is:
The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.
So, if GDP declines for 2 quarters in a row, bam, recession. Many economists do not like to use this though as if growth stays flat at 0.6%, then there was no recession but it certainly felt like one.
Again, many definitions out there and arguments about what defines a recession. Using quarterly data is vague, as you cant pinpoint exact beginning or end. Plus, GDP defined recession ignores unemployment rates..
Posted by Noah | April 22, 2008 10:22 AM
But if Q1 is 0.5%, that isn't a decline in the GDP. Its a growth - a small one, but the GDP would still larger in Q1 than it was in 2007Q4.
However, I agree with you that any number under 0.6 will cause lots of headlines. That's why I prefaced my comment by saying "dictionary definition" - newspapers don't care. Rightfully so, since most people don't care either. They care more about employment rates and such.
Now, do you think such news would affect Manhattan housing prices? Or do the market players here realize that news doesn't really matter much? At least not relative to major investment banks going under!
Posted by Steve | April 22, 2008 10:41 AM
Steve - now Im confused..we are not talking about growth here, we are talking about actual declining growth from previous quarters; not growth in general.
Its not that GDP needs to be negative for 2 quarters, it just needs to decline for 2 quarters.
So, 0.5% would be a decline of 0.1% from Q4, and mark the 2nd consecutive quarter of declines and case the headlines.
Anyway, I think the effect will be minimal, and will re-inforce the decline in confidence here for our buyers. I dont think it will cause a mass panic by any means. Another Bear-type shock would though
Posted by Noah | April 22, 2008 10:47 AM
At this point, I think we agree, we're just using different vocabulary. I'd call 0.5% a decline in "GDP growth", but still an increase in the raw GDP itself. Like you said, there are a ton of definitions for a recession out there. Some involve rate of growth (first derivative) being negative, some involve raw GDP being negative.
Personally, I don't think any are good (sounds like you agree). If we have 5.0% growth, then 4.9% growth, then 4.8% growth, are we in a recession? No, that would be a wonderful economy. Similarly, if we have 0.1%, 0.2%, 0.3%, is that considered good? No, that's a pretty sad state of affairs.
Posted by Steve | April 22, 2008 10:55 AM
exactly!! yes I do agree
Posted by Noah | April 22, 2008 11:19 AM
a recession is 2 quarters of economic contraction, meaning negative GDP growth. period. If GDP growth comes in positive, we're not in a recession, whether the newspapers say so or not. If we're at -0.1% GDP growth, then we can call the first quarter the possible beginning of a recession, but only if the second quarter comes back at -0.1% or worst as well.
http://www.investorwords.com/4086/recession.html
Your definition would not call 2 consecutive quarters of GDP growth at -1% in the first and -0.5% in the second a recession. That is certainly a depression, even if decelerating.
If you still question it, plot the graph. By your definition, the US was in a recession in Q2 and Q3 2006 (GDP Growth declined from 4.8% in Q1 to 2.4% in Q2 and 1.1% in Q3), and I think everyone can agree that was not the case.
Posted by mike | April 23, 2008 12:33 PM
mike - man, why did I think otherwise for so long and overlook Q2/Q3 in 2006. Your right.
Investor words says:
A period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters.
I guess I interpreted 'a decline in GDP' to be actually a 'decline in GDP', and not 'NEGATIVE GDP' for 2 consecutive quarters.
How would you define recession Mike?
Posted by Noah | April 23, 2008 5:59 PM
A decline in GDP = negative GDP growth. I'm not sure what there is to interpret.
Declining positive GDP growth (ie from +1% to +0.5% to +0.4%) signifies decelerating growth in GDP, not GDP decline. That isn't a recession.
Declining GDP would always equal negative GDP growth.
Posted by mike | April 24, 2008 10:29 AM
ok, I get this now, but is that how YOU interpret a recession? Still, there are arguments about that.
Posted by Noah | April 24, 2008 11:28 AM
yes, I interpret a National recession that way.
I would apply a looser definition to a local recession where the numbers are less available. For instance, Detroit is probably in a depression, beginning in 1998-2001. New York City was in a recession in 1989-1991 (while the country was not - also to note, National Housing prices did not fall year over year, while they did in NYC), but I'm wary of jumping to conclusions about NYC at this time - it has a lot more bounce-back ability than other cities.
I would catagorize Phoenix, Miami, Las Vegas, LA, Orlando, and Baltimore (was probably already in one) as entering a recession. The nation as a whole is stagnated in growth, while places like SF, and I think NY are still experience some level of reduced growth. It's a by-product of having a diverse economy that, while financially focused in NY, is financially focused on several industries. Tech is holding up so far, which is holding up the SF/San Jose area, by the way.
Posted by mike | April 24, 2008 1:18 PM