GDP and Recessions — A Valuable Metric (but Overused)

In this piece on GDP and recessions, John Lounsbury expands on an earlier article about how this particular recession is different. Catch more of John and other top-notch econ writers at Global Economic Intersection, John’s new website on economics.

Gross Domestic Product (GDP) is one of the most widely followed metrics when people try to assess economic health. There are many questions about how meaningful GDP really is. EconIntersect’s Steven Hansen has frequently asked this question. However meaningful it is, it’s still dominant in the thinking of many. For that reason, we have undertaken a review of the data starting with 1947, when the St. Louis Fed base starts.

In the following two tables the real GDP growth rates are listed as found in the St. Louis Fed Fred data base. NBER (National Bureau of Economic Research) official recessions are highlighted in red and negative quarters not in recessions highlighted in green.

Click on images for larger graphics.

The averages for real GDP and the one standard deviations are plotted for 20 quarters following the quarter in which the eleven recessions since 1947 have ended. In five of these recessions a follow on recession has occurred (and ended) within the 20 quarters (five years) after the previous recession ended. The most recent such occurrence was for the recession of 1980 with the double dip second recession of 1981-82. The next quickest repeat came with the recession of 1960-61 which started eight quarters after the end of the 1957-58 recession. The other three cases were the recessions of 1948-49, 1953-54 and 1957-58 which were followed by the next recession 12, 13 and 14 quarters after their ending quarter.

Note that the ten quarters that had negative GDP growth but were not included in recessions all occurred before 1982. Three of these were in quarters immediately preceding recessions and seven were isolated GDP dips to contractions that were not associated with officially defined recessions.

The following graph includes the recessionary quarters in the averages.

The data for the current recovery has been plotted with two assumptions: (1) the recession ended in June, 2009 and (2) the recession ended in 3Q/2009. Since the NBER has not yet dated the end of the recession, there is no guarantee that we have properly selected end dates that will eventually be confirmed.

The weakness of GDP recovery after the assumed end dates for the current recession is very evident in the above graph.

The following table compares the current recovery to other weak recoveries. The basis for selecting weak recoveries was that they satisfy one of the following criteria:

* The first quarter of recovery is in the bottom three.

* The third quarter of recovery is in the bottom three.

If the bottom three criterion was also applied to the second quarter of recovery, the 1969-70 recession would have been added to the five selected (making six). This was not done because after three quarters it was a stronger cumulative recovery than the other five.

Note that the current recovery is the only one that has experienced a quarterly decline in real GDP growth as the first three quarters of recovery unfolded. The bottom five are more easily compared in the following graph:

From an article at Seeking Alpha:

The current recovery started more strongly than either of the two preceding recoveries that started 1Q/1991 and 4Q/2001. However, the GDP declines in those two recession were much shallower than in 2007-09 and were recovered by the end of the quarter in which the recession ended in 2001 and in the third quarter after the 1991 recession ended. After three quarters, the 2009-10 recovery still has not regained the real GDP losses of 2007-09.

Expanding on that observation, below is an accounting of the quarters following the latest eleven recessions.

Many focus on GDP as a measure of when recessions start and end. However, the NBER procedure includes a number of econometrics, of which GDP is only one. From their procedure document:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

A graph from David Rosenberg, Chief Economist and Strategist at Gluskin Sheff in Toronto, explains just how bad some of the other metrics the NBER looks at are behaving:

This raises the obvious questions: Is it possible that the NBER will put the end of the recession much later than most are thinking today? Is it possible that the NBER will eventually date the end of the recession later than today’s date?

We have two economies in the U.S. There is the economy of finance and international commerce, both of which are making money. There is the economy of the rest of the country which is still in trouble.