Disastrous GDP numbers make double dip scare real

I have stopped reporting the quarterly GDP numbers but this last reading bears mentioning. The US Bureau of Economic Analysis reported the following at 830AM ET:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.

The immediate reaction was a drop in the dollar to record lows against the Japanese yen and Swiss franc, a drop in Ten-year yields to 2.88%, a drop in the Dow Futures to –137 and a rise in the Gold price by $10 to $1626.

While the headline number was well below expectations of 1.8%, what must be noted are the major revisions. Q1 2011 is now reported as +0.4%. That’s a major downward revision which demonstrates that QE2 was in fact doing nothing for growth and that the US is already at stall speed even without the negative impact of the European sovereign debt crisis and the debt ceiling fiasco. The double dip scare is real.

Here is how the BEA explains the extensive revisions:

Current-dollar GDP was revised down for all 3 years: $77.6 billion, or 0.5 percent, for 2008; $180.0 billion, or 1.3 percent, for 2009; and $133.9 billion, or 0.9 percent, for 2010. The percent change from the preceding year was revised down from an increase of 2.2 percent to an increase of 1.9 percent for 2008; was revised down from a decrease of 1.7 percent to a decrease of 2.5 percent for 2009; and was revised up from an increase of 3.8 percent to an increase of 4.2 percent for 2010. Current-dollar gross national product (GNP) (GDP plus net receipts of income from the rest of the world) was revised down for all 3 years: $82.9 billion, or 0.6 percent, for 2008; $174.1 billion, or 1.2 percent, for 2009; and $132.8 billion, or 0.9 percent, for 2010… Current-dollar GDP was also revised down for all 4 years from 2004-2007: $14.5 billion for 2004, $15.4 billion for 2005, $21.7 billion for 2006, and $33.1 billion for 2007.

While I am reporting this, I should note that the President made news regarding his understanding of the origins of the deficit and our slow growth recently when he said:

“For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card. As a result, the deficit was on track to top $1 trillion the year I took office.”

This is patently false. In fact, this is scary. Dean Baker tells us:

This is seriously mistaken.

The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."… Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn…. This misunderstanding of the origins of the budget deficit could explain President Obama’s willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid…

Hat tip to Brad DeLong for the information

In sum: The President has no idea why the deficit exploded, we are in jeopardy of default, and we will cut spending in into the teeth of a serious growth slowdown. America is rudderless. God help us.

  1. David Lazarus says

    The US economy will probably implode once the austerity measures kick in. The only solution for individuals will probably be bankruptcy. Same for some of the states. The problem will be that until it is clear that there is a bottom people will be unwilling to invest in the future. Just look at Japan, and its long deflation of its bubbles.

  2. Dave Holden says

    Not sure I follow this. Hadn’t tax revenues been artificially inflated because of the debt financed boom. Or did the Congressional Budget Office’s projections factor that in?

    1. Edward Harrison says

      The BEA revises the numbers years after they come in based on more complete information like tax receipts. These benchmark revisions can induce wholesale changes in how we look at the recession. For example, I think one quarter in the 2001 recession flipped from negative to positive after a benchmark revision.

      So these numbers are just a more accurate version of the one’s we first received – and as you can see there are major changes, mostly to the downside.

      1. Dave Holden says

        OK so I’m obviously being as stupid as Obama..

        What I don’t get is this passage:-

        “The Congressional Budget Office’s projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not “on track to top $1 trillion.””

        Wasn’t the projection of only “just $198 billion dollars” deficit that low because it was the height of the debt fueled boom. Assuming there hadn’t been a decade of loose monetary policy inspired “growth” and associated revenues would this deficit really be as low as 198 billion dollars.

        1. Edward Harrison says

          You’re 100% right. But the reality is the deficit projection was $198 billion, not $1 trillion. If Obama doesn’t know that, then he’s going to miss the big picture.

          1. Dave Holden says


            For Baker to assign the deficit simply to the downturn seems to me just as a much a misunderstanding of the deficit as the one he ascribes to Obama.

            I’ve said it before here but Obama reminds me so much of Blair. Both are smart and above all – for good or bad – both are politicians. When stupid people *cough* Bush *cough* say stupid things its probably because they’re stupid. When smart people say stupid things I have to ask why is a smart person saying something stupid.

            In this case, again I have to think it’s politics. Obama has a narrative to sell – rightly or wrongly. For the people he’s trying to reach I suspect nuances of deficits aren’t a primary concern.

        2. Dan Lemnaru says

          I’m with you Dave. It’s the same as it happened with Spain (and to a point even my home country, Romania). They were supposedly fiscally prudent, but the growth of the economy they were getting their taxes from was false (real estate inflation and overbuilding). In reality, if the situation (or at least the risks) would have been assessed correctly, they should have had huge surpluses during this boom.

          This takes me to the recent procyclicality blog entry. The reality is that the political system reflects human nature. When the times are good we want then to be even better – now! When they’re bad, we want someone to fix it all at no cost to us. Basically, we want to have our cake and eat it too.

          1. Dave Holden says

            Hi Dan,

            Yes the same can be said of the UK and Gordon Brown’s oft mentioned mantra of “no more boom and bust”. That didn’t quite work out..

          2. David Lazarus says

            Yes but if they had decent capital gains taxes it would have deflated the bubble throughout. The same problem affected the UK. Housing gains were under taxed through inadequate capital gains taxation. In the US local governments spent those extra property taxes like they were permanent income. So they are doubly hit when the property crash hit them.

            As for Gordon Brown saying “the end of boom and bust” I also thought that was a huge mistake at the time. Just because we had a long boom did not mean that recessions were eradicated. I take the view that recessions clear out bad investment decisions. Intervening in the economy to eliminate these downturns reinforced peoples idea that they were great investors and could defy gravity, meaning they took on more debt and greater leverage. For banks it showed that they had been too conservative in their risk assessments. It created a pro-cyclical boom, until it was unsustainable. That is why I think the full employment mandate of the Fed is very bad for the US.

  3. Christopher Skidmore says

    No double dip. There is a very real split between US corps and the economy. small and medium business will get hit hard but US corps are protected with growth of overseas and improving productivity and effiiciencies domestically due to things like automation. The only way a double dip becomes a real scenario in my book is if there is a global slow down. Earnings trumps everything else. I belevie you can have a US economy in the dumps and have the DOW at record highs. Not the usual line of thinking I know.

    1. David Lazarus says

      While US corporations are far more immune to recessions they are still making cuts in employment. With their markets going into recession they will suffer even if they are well diversified by region. If growth was stronger then yes a double dip would be impossible, but the growth has been very anaemic so a double dip is much more likely. As for global recessions there have only been three since 1945. Two as a result of oil price shocks and the last as a result of the credit crunch.

  4. Chaos says

    No demand = recession. It doesn’t matter if work is automated or if it’s overseas.

    Oversea growth is pushed by USA and Europe demand, there is very little demand (relative to total GDP) and income is not growing fast enough in developing nations. Most of their growth was from investment (which was pushed by capital flows first, and by credit expansion later which has reached its peak there too).

    Developing nations can’t push global growth, and I doubt if they will ever will do, because cost-push inflation will rise and serious carbon energy supply shortages will increase prices. I also would say that this will stop high growth in occidental nations too.

    The age of growth is finishing, and we enter the age of deflation and degrowth.

    1. David Lazarus says

      If both the US and Europe are going into austerity then there will be recessions in those territories. Germany is already showing signs of trouble ahead, and not from the banks. That is the cherry on the cake.

      China might have a big slow down but global recessions are very rare. It will be a decade or two of austerity morphing into depression in the US and Europe, with Ireland and Greece already in depression. I suspect that eastern Europe will fall next and that will mean problems for many governments.

      1. Chaos says

        There may be nominal growth, but real economic growth will be scarce. China and India are both suffering already high inflation and this means real growth is less than it looks like in nominal terms.

        If there was really growth we will see increasing demand in these nations, but demand growth is increasing very very slowly from what would have to be expected from the numbers. Add to that that a big part of the investment is unproductive or just plain malinvestment (big bubble in property) and we have recipe for global recession and localized depression.

        I agree this will be problematic politically and socially. IMO the era of free globalized markets and deregulation is coming to an end, and as situation worsens government intervention will raise. If this is not done we may see a mutation to more command economy like and very little growth (if any), rationalization at some point etc.

        1. David Lazarus says

          I do think that the social changes will be immense. I suspect that a lot more countries will fall into social disorder. The only thing that has kept things going has been government stimulus. Though it is incredible how fast they forget the lessons of the thirties. Maybe the public need to suffer the consequences of their demands for austerity. Yes globalisation will slowly unravel as people find their jobs being exported. I do think that capital controls will return as countries realise the negative impacts of money flowing in and out. South Korea has already started that measure.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More