Friday, July 31, 2009

Contributions to the recession 2008q2 to 2009q2

I was curious about this, so I downloaded some some GDP data from the BEA (

Below is a graph showing the change in Private Investment from quarter to quarter. These changes are important because they mean different things. In particular, the collapse in the housing industry shows up in investment because housing is counted as an investment final good, not a consumption final good. Lots of debate has centered around what will "replace" the permanent fall in consumption as a percent of GDP due to higher savings rates. An equally important question to ask is 'What will replace residential housing in investment'. Histrocially speaking residential housing has been around 30% of total investment. In 2004 and 2005 9the peak) residential housing made up over 36% of total investment. If we are lucky housing will return to trend quickly, but even then a gap of 5% of total investment will have to be made up for elsewhere.

Yves Smith explains the inventory component:

There was a $140 billion reduction in inventories in Q2. I have been saying for some time that this would set us up for lots of upside come Q3 and Q4 as the inventory purge dissipates. So, we will get a technical recovery in my opinion. The question is whether there is any underlying demand uptick behind the inventory changes. In the data below from the BEA website, you can clearly see highlighted in red on the right that consumers are not even spending on basic items. Spending on non-durable goods was down 2.5% annualized. That is not good.

My overall take here is this:

  • The downward revisions to 2008 should have been expected. They confirm how deep the mild depression was. It started in December 2007, creating a weak economy early in 2008, and only intensified due to the meltdown post-Lehman. Those like Larry Kudlow who were saying well into 2008 that no recession was going to occur were misguided.
  • Because inventories have been purged so much in Q1 and Q2, I fully expect much better numbers in Q3 and Q4. Remember, a less negative inventory number translates into a net ADD to GDP. So, we don't need to build inventories, only purge them less. That's a guarantee for Q4 if not Q3.
  • However, the fly in the ointment is consumer demand. It is still weak. Look at non-durable spending. If we don't see a significant uptick come Q3, you should be worried.
  • My call for Q4 2009 or Q1 2010 end to the recession still stands.

Finally, I found this interesting:

% of the GDP pie made up by its slices

Personal consumption expenditures
Gross private domestic investment
Net exports of goods and services

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