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Two Thoughts on Today's GDP Figures

1/30/2013 01:06:00 PM
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The Bureau of Economic Analysis released the advance estimate for fourth quarter 2012 GDP. It estimates that the economy shrank by 0.1% from October through December. Ezra Klien guesses that the unusually sharp year-end contraction of defense spending, in anticipation of the Pentagon sequester, was the key culprit behind the disappointing data. As he points out, in fourth quarter the military cut funding by a whopping 22.2%. As an aside, note that I called this all a month before it happened.

I have two thoughts to add to this.

First, bear in mind that the advance estimate is the first of three different estimates that the Bureau of Economic Analysis will release on fourth quarter GDP. The third, final release won't come for a while (a year, I think?) but will eventually include a survey of more than 98% of all business in the country--that is, the third estimate will be pretty accurate. But the first estimate doesn't have anywhere near that amount of data, so most of today's figures reflects the Bureau's extrapolations rather than real data. The point is that the first estimates are often wildly inaccurate, and pretty much useless as a real-time economic indicator. That said, since the prior data point, third quarter, showed growth of 3.5%, I'd say that the fourth quarter estimate is somewhat more likely to be too optimistic than too pessimistic.

Second, I'm sure the media will go crazy over the issue of whether this might turn out to be a recession based on the "two-consecutive quarters" of negative growth definition of a recession. But lets be clear, there is no formal definition of a recession, and two-consecutive quarters of negative GDP growth is definitely not required for it to be a recession (that condition was not met, for example, in the 2001 recession). Normally, we rely on the subjective determination of the National Bureau of Economic Research (NBER), which retrospectively identifies what its members believe were the starting and ending dates of  recessions. But again, lets be clear--NBER is a private organization that has no affiliation with the government, and no official authority to date recessions. Economists usually use the dates NBER comes up with because they usually have good arguments to back up their claims, that is all.

So if someone wants to call this a recession, I certainly won't disagree. According to our most recent data, the economy was, in fact, receding.