The National Bureau of Economic Research is the official arbiter of recessions in the U.S. It is not in the business of helping investors or speculators, so its pronouncements are not particularly timely. It often dates a recession long after the economy has begun contracting and often announces a recovery long after it has begun. The failure of the NBER to declare the Great Recession over means very little in terms of the state of the economy.
There is really no agreed-upon definition of recession or depression. The terms are more about public relations and confidence than about economic substance. Nearly half of the 35 years from the U.S. Civil War to 1900 were characterized by panics and crises. These panics were not called recessions or depressions. After the 1930s, politicians wanted to distinguish the Great Depression from whatever economic downturn the country was experiencing.
Yes, there is a rule of thumb that two consecutive quarters of contracting output (negative GDP) qualify as a recession. But this is not necessarily the case. Many would agree the U.S. economy was in a recession in 2001, even though the economy did not contract in two consecutive quarters. The NBER looks at a number of variables besides GDP, including employment, to make its determination.
There really is no doubt among serious people that the U.S. economy is doing significantly better than it was in 2008 and in the first half of 2009. Nearly every economic time series is doing better than it was a year ago. It is true that the labor market continued to deteriorate even while other economic measures were turning up.
However, the labor market is often -- and more often in recent business cycles -- a lagging indicator. That said, the weekly initial jobless claims appear to have peaked in late first quarter 2009. Surprising many, the unemployment rate appears to have peaked last October, according to the most recent data. More recently, private-sector employment has begun rising.
One indicator I have been watching more closely is the gap between orders data and shipments. Orders data, such as durable-goods orders, have risen faster than shipments. Therefore, it stands to reason that output has to increase.
Many of those who see the glass half-empty acknowledge that nearly every economic gauge is stronger today than in the middle of last year, but they dismiss it because it is due, they say, to inventories and government spending.
The problem with this assessment lies with the selective use of the data. Some skeptics want to dismiss the inventory cycle on the way up but fully take it into account on the way down. After all, despite the embrace of just-in-time inventories and other innovations to more efficiently manage supply chains, the business cycle is still largely influenced by the inventory cycle. Moreover, until the first quarter of 2010, the issue has not been inventory accumulation but the pace of the de-stocking. The inventory cycle still appears to have several quarters to play out.
It is true that the government has thrown a lot of money at the economy through various channels, and this is surely playing an important role in the economic recovery. Transfer payments, for example, have bolstered incomes and consumption. Some of the assistance to U.S. states may have helped prevent deeper cuts in services. Many of the infrastructure projects also likely aided in the recovery.
Fiscal spending goes from a tailwind to a headwind next quarter. Is the economy going to contract again? If government spending were the only engine of the economy, we would have to answer in the affirmative. But it is not the only engine. With the stability and, yes, modest improvement in the labor market, the basis of a self-sustaining recovery is falling into place. Equity prices are higher, and for the first time in several years, the S&P/Case-Shiller house price index has risen on a year-over-year basis. This speaks to continued rebuilding of household net worth.
Rest assured, Pollyanna I am not. The U.S. economy faces serious challenges. That is why I am not trying to make the case for the kind of growth we would usually experience after such a deep contraction. My guestimate for U.S. growth has been and continues to be roughly 3% on a quarterly average basis this year and into 2011. If I am wrong, I suspect I am on the low side rather than too high.
The terms of the debate have shifted. In surveys, I don't see any notable economists forecasting a renewed contraction in the economy. Some pundits may talk about a double-dip, but that is not their baseline forecast. It is tail risk, plain and simple. The debate between optimists and pessimists is largely the difference between 3.0%-3.5% growth and 1.5%-2.0%.
The U.S. economy expanded by 3.2% on an annualized basis in the first quarter, according to the government's preliminary estimate. Although this is slower than the 5.6% pace in the fourth quarter of 2009, the quality of the growth was better. Real household consumption rose 3.6%, after a 1.6% increase in the fourth quarter. This contributed about 2.5 percentage points to the 3.2% growth.
Inventories contributed about 1.5 percentage points. Trade -- that is, net exports -- subtracted about two-thirds of a percentage point from growth. Note, however, that the government does not have the full quarter of inventory and trade data yet, and it is here that economists will focus their attention when trying to assess the direction and magnitude of GDP revisions, which typically are substantial.
Business spending on software and equipment rose by around 13%, but spending on structures fell 14%. And for the first time in three quarters, residential investment (construction) also fell. This, then, is the cloud in the silver lining: The housing and commercial real estate market is remains in a fragile state.
The other somewhat worrying note in today's report is that the core personal consumption expenditure deflator, one of the Fed's most cited inflation metrics, fell to 0.6% from 1.8% in the fourth quarter. This is the lowest since this time series began in 1959. This is too close to deflation to give the Fed much comfort.
The takeaway is that first-quarter 2010 GDP confirms that the recovery is gaining traction. It is not stellar growth. It is just fast enough to allow some net job creation. It will be among the strongest in the G7.
Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;
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