Recession May Have Started in 2007
The Commerce Department reported a sluggish 0.6% increase in the GDP. The WSJ’s economics weblog found a lesser-known index the Fed uses shows negative economic growth began last year:
A separate measure of the economy touted by Federal Reserve officials last year — gross domestic income — posted its largest decline, at a 1% annualized rate, since the 2001 recession, according to the same GDP report. That drop, said J.P. Morgan economist Michael Feroli, “lends weight to the argument that a recession started at the end of last year.”
GDP is a consumption-based measure, adding up consumer, business and other spending and investment. In contrast, GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first estimate.
Fourth-quarter GDI figures are delayed further until the third and final GDP estimate to incorporate year-end corporate profits data, so Thursday’s report offered the first look at GDI for the fourth quarter of 2007.
This index explains Atlanta Fed president Dennis Lockhart’s comments:
That said, it’s clear the economy is in a slowdown that resembles past periods that were the leading edge of a recession. Economic growth has been slowing since the third quarter of last year coming off solid growth rates in the second and third quarters of 2007. Following a sluggish fourth quarter, I expect that GDP for the first quarter of this year will show little, if any, growth.
Also, personal income growth has been flat, and there has been significant softening of employment, manufacturing activity, and sales at the retail and wholesale levels. Indeed, some areas such as employment actually have been contracting. Job growth in recent months was negative, and the unemployment rate has moved up to 4.8 percent, compared with 4.5 percent last summer.
It’s possible—given certain strengths such as strong business balance sheets and export growth—that the economy will not pass the threshold into a technical recession. In considering the current economic situation, I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow.
Lockhart also addressed the Fed’s recent interventions in the financial markets (Bear Stearns and the alphabet soup of auctions):
The line that separates restoring market function from merely redistributing losses and gains is not a bright one. This is the reason that policymakers only rarely and reluctantly intervene in markets.
Also, the distinction between liquidity problems and insolvency is not a trivial one when monetary authorities respond to troubles of market players. The critical evaluation is the systemic risk posed by the failure of an institution.
Some believe the Fed has overreacted. Others have said the central bank has been slow to respond to building problems. And still others have warned that the Fed has crossed lines that define appropriate function.
But from where I stand, Fed actions were taken with a prudent acknowledgement of the unintended consequences that may accompany almost all policy interventions. The actions taken by the Federal Reserve over the past several months were taken in perilous and fast-moving circumstances. Given the likelihood of continued financial and economic uncertainty, the public authorities charged with achieving and maintaining financial stability must preserve the capacity to act decisively in the best interest of the economy as a whole. I believe the Fed has done that.
[picture via wallyq]
