The Government Takes Its Turn Restating Results

Oops, they did it again.

Rather than stellar 6.1% growth in the first quarter, the government Wednesday reported GDP actually rose by a still robust, but less impressive 5%. More troubling, the government also revised downward GDP for the first half of 2001, resulting in three quarters of negative growth from what was previously a one-quarter dip.

The result of the revisions was that the GDP registered a decline of 0.8% for the first three quarters of 2001 vs. the previous estimate of 0.1% growth. The third and fourth quarters of 2001 were each revised upward, but that didn't alter the direction of either quarter (as was the case in quarters one and two, which went from growth to decline): The third-quarter decline was revised to 0.3% from 1.3% and the fourth-quarter gain was changed to 2.7% from 1.7%.

The Commerce Department also said second-quarter 2002 growth was a paltry 1.1% vs. consensus expectations for growth of 2.3%. Final sales reportedly fell 0.1% last quarter vs. a 2.4% rise in the first. Business spending on equipment and software rose 3%, but overall business investment fell for a sixth consecutive quarter.

Of course, this is just the "advance" report on second-quarter GDP and is thus subject to revision, which can be extensive as the aforementioned suggests.

Additional revisions are certainly forthcoming. The official productivity numbers and the expectations for the timing of recovery in corporate profits are very likely to be ratcheted down, as will estimates from many Wall Street economists, particularly those who have clung to a view there was no recession in 2001.

Yes It Was

The data -- now irrefutable -- show that a recession did occur.

"Today's numbers ... finally demolish the argument we didn't have a recession," said Anirvan Banerji, director of research for the Economic Cycle Research Institute, who noted only four of the past 10 recessions have had more than two quarters of negative GDP. "Until these numbers came out, people were able to sustain this argument that we never had a true recession."

Banerji, of course, was not among those recession deniers. Rather, he has compellingly argued how those so-called New Economists were a major contributor to the excesses of the bubble, as detailed here last week.

"If you have this view the economy is so stable, not vulnerable and productivity growth will immunize us [against recessions], it has a major impact on what valuations ought to be," he reiterated Wednesday.

Regarding an earlier piece about price-to-earnings valuations (more on that later Wednesday), Banerji suggested that the key issue isn't that P/Es go down during recessions as earnings hit their nadir. More important, he suggested, is that before P/Es get high, "they should get very low" as earnings peak, which they "never did" in recent history.

That, Banerji contends, is a function of the mindset that we really were "recession-proof," meaning bear markets were unlikely and higher P/Es were justifiable. "All those arguments [were] undermined" by Wednesday's GDP revisions, he said, not to mention recent market action.

Speaking of recent market action, some observers are going to be struck by the stock market's relatively tame reaction to Wednesday's GDP data, as well as the weaker-than-expected Chicago Purchasing Managers Index. (Arguably, the July Chicago PMI data, at 51.5 vs. 58.2 in June and expectations for 56.5, was more important than GDP because it's forward-looking.)

But before you get excited about the market's "resilience to the bad economic news," consider the possibility that the stock market's recent swoon was its way of presaging the economy's downward path, rather than evidence of any "disconnect" from the economy's presumed strength.

As of 2:26 p.m. EDT, the Dow Jones Industrial Average was down 1.3% to 8563.93. The S&P 500 was lower by 1.1% to 892.83 but off its earlier low of 889.82 while the Nasdaq Composite was down 2.6% to 1309.67.

And Other Things

Banerji cautioned against projecting the downward momentum in Wednesday's GDP data as a precursor of future trends. Projecting the past into the future is the mistake economists (and the government) made in their overestimation of the economy's strength in 2001, he said.

"Seeing today's second-quarter GDP number and projecting it forward, [you'd presume] any kind of shock could put us in double-dip," he said. "This kind of projecting doesn't work at turning points."

Banerji stressed that leading indexes (particularly ECRIs) hold the key to predicting the future and "the Weekly Leading Index is still very much saying 'no double dip' this year."

The economist also dismissed my contention that -- leading indexes notwithstanding -- there could be a self-fulfilling prophecy in Wednesday's data. That is, the accompanying headlines and expected downward revisions to many economists' forecasts could have a negative effect on consumer/investor psychology, and thus spending.

"I'm not saying there is no danger going forward, but the spin about [the economy being at] 'stalling speed' is going to be off the mark," he said. "I don't know that people in general pay a lot of attention to backward-looking numbers."

Perhaps not, but Wednesday's GDP revisions are renewing a sense among some that there's nothing they can trust anymore, a notion doesn't bode well for either the economy or the stock market.

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