Picture of an Economy Collapsing
Graph of Quarterly Change in GDP
See update to this chart for late February, below.
The graphic above shows the dramatic drop in annualized GDP quarterly growth for the fourth quarter of last year. Two other points are well demonstrated in this data:
· The effects of the stimulus rebate last year is clearly seen in the spike in the second quarter of last year. The jump from less than 1% in the first quarter to about 3% in the second is probably attributed to the checks that were sent to taxpayers in the late first quarter. It was effective, but it was simply too small to overcome the momentum that had accumulated to the downside by that time.
· The drop in the 4th Quarter is actually more dramatic than shown. The drop in consumer spending, which is behind the GDP drop, was so steep that producers could not adapt their production fast enough to counter the fall in sales. As a result, many of the products made during the quarter simply piled up as unsold inventories. But, the production was counted in GDP, so the slowdown in GDP was lessened by this artifact. The unsold inventories, now gathering dust all around the country, is the main reason we see huge layoffs being announced in January—pointing to an even worse drop if quarterly GDP figures for the first quarter of this year.
There is no mystery about the dramatic slowing of consumer spending. For years prior to 2008, consumer spending had been artificially propped up by home loans. Home prices were going up so fast that home owners could refinance their new-found wealth one or twice a year and spend the proceeds on home improvements, new cars and large television sets. When the housing bubble burst, the prop was pulled from consumer spending, and it fell like a stone.
I expect unemployment to continue going up as millions of workers are being given pink slips every day so far in 2009. Manufacturers have to trim their production not only to make up for the over-production of late 2008, but they must also slow production lines for the lower sales levels anticipated in the future. This spiraling effect is well understood in business and economics. It’s hard to stop, once it gets going, and it is going now with full steam.
The scary part of this scenario is that this exact same process is being repeated in Europe, Asia, Latin America and Africa. No region is immune; no country can escape its effects. The good news is that virtually all the world’s economies are generating counter-cyclical spending plans to help pull out of the nosedive we are in. Simultaneous stimulus spending will help the world’s economies recover faster than otherwise, since there can be no beggar-thy-neighbor polices when everyone is going through the same thing.
Also, keep in mind that unemployment is a lagging indicator of future production. By the time unemployment stops falling, the recovery is likely to already be underway.
UPDATE on 4thQ, 2008 GDP (2/28/09)
The Commerce Department has just revised the 4thQ GDP estimates, and the news is not good. The top chart shows a 3.8% annualized decline. The revised figures, show in the chart below, are much worse:
It turns out that a better estimate of the fall was 6.2%, not 3.8%. Every major component of the economy shrank, except government spending. Economists said all signs point to a similar drop in output in the current quarter.
The revision could be traced primarily to a contraction in inventories of unsold goods, which the government had previously said had grown. Businesses were able to trim their inventories faster than first estimated. The good news is that the pile of unsold goods is not as large as first estimated.
But, traditionally inventories in a recessions fall much faster than they have so far. This suggests that the worst is yet to come as far a cutbacks in production.
The final adjustment will be made next month by the Bureau of Economic Analysis.
