A Second Hand Conjecture

I understand that many find the media’s treatment of the economy under Bush biased. I agree with that. No argument from me. So I understand where Instapundit and others, including many denizens of this site, are coming from.

That being said, that does not mean the media is being too pessimistic now just because if Clinton, Gore or Obama were in office they would tend to be a bit more positive, and would have been much more positive when the economy was doing well. They are in fact being way too positive, especially business and finance oriented media. Yeah, it is so bad out there that the doom from the media is understating it. First Insty:

DUDE, WHERE’S MY RECESSION? (CONT’D): “Consumers boosted their spending at a 1.5 percent pace in the second quarter. That was up from a 0.9 percent growth rate in the first quarter and marked the best showing since the third quarter of 2007 when the economy was still performing strongly despite the severe housing slump.” On the other hand, the inflation picture isn’t so great.

True as far as it goes, and it was pretty much a one time shot from the stimulus package, and that is only the early estimate. It will probably be revised down eventually. Let us dig into the details of the latest data:

GDP: Despite all of the gloom, 1.9% was significantly below expectations of 2.3%. As I suspected the impact of the stimulus was muted, and I believe will detract down the road.
Initial Jobless Claims: 448k. That’s the worst level since April 2003 and continues a string of reports over 400k.
First Quarter GDP Revisions: Revised down to 0.9% from 1.0%. First revised up, now back down, and likely to be revised downward again.

Now here is the big one:

Q4 GDP Revisions: Revised from +0.6 down to -0.2%. I have been arguing that it was highly unlikely the economy didn’t go negative in the fourth quarter of 2007, and that was true even if the quarter as a whole was positive, because that only meant that the negative activity in the latter half of the quarter wasn’t enough to overcome the growth in the first part. This adds to my conviction that the first quarter will be revised further downward. The second quarter will likely eventually be ruled negative as well. Folks, the evidence is pretty darn solid that we are in a recession. It would be mind boggling if we were not given the collapse in housing, construction and in the financial sector. In fact, I suspect the fourth quarter of 2007 to be revised even further down.

Why am I so convinced of the direction of the revisions?

Inflation: The personal consumption expenditure price index rose at a 4.2% annual rate. Bad enough in and of itself. However, here is an odd data point. The GDP price index has been running lower than the PCE index. I think that anomaly will narrow. It was at an extreme level in the second quarter. The GDP price index only rose 1.1% in the second quarter! The two price index’s do measure different things, but the gap from 4.2% to 1.1%, especially given my anecdotal experience of inflation, seems indefensible. I expect a significant revision.
Consumer Spending: The government mailed out $100 billion in rebate checks. Yet:

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — decreased 0.5 percent in the second quarter, in contrast to an increase of 0.1 percent in the first.

Here is more on the revisions which go back twelve quarters:

The annual revisions don’t change the overall view of the economy: From 2004 through 2007, the economy grew at an annual rate of 2.6%, a tenth of a percentage point slower than earlier estimates. Growth was revised lower in all three years covered by the annual revision, with 2007 now coming in at 2%, rather than 2.2%.

Most economists believe the economy’s long-run sustainable growth rate is 2.5% to 2.75% per year.

Eight of the 12 quarters were revised lower, three were revised higher, and one was unchanged.

Some of the details look a little different. Over the past three years, consumption was a bit weaker than assumed, while business investment was slightly better. The housing collapse was worse than thought. Profits and income from assets were higher, while wages and salaries were lower.

Consumer spending has averaged 3% growth over the past three years. Business investment was revised up to a 6.5% pace from 6.1%. Disposable personal incomes rose 2.6%, unrevised.

Profits were revised higher for all three years, by a cumulative $237.1 billion. Profits in the financial industries were lowered by a cumulative $61 billion, while profits from nonfinancial companies were revised up by $254 billion over the three years.

Before the revisions, profits had been at historic highs in relation to national income.

Some of those profits flowed through to the owners. Income from assets was revised up by a total of $61 billion for the three years.

Meanwhile, the compensation of workers was revised lower by $47 billion. Most of the decrease in compensation was accounted for by smaller health-care benefits due to lower-than-assumed medical payments made by bosses on behalf of their employees.

Update: From Econoday

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