Economic Notes: Out of Sight
5/01/2009
Told by one woman that he was very “homely,” Abe Lincoln said “there’s nothing I can do about it!” To which she replied: “You could stay out of sight!”
The economy would do well to heed that advice given the advance estimate of Gross Domestic Product (GDP) for the first quarter (Q-1) of 2009.
The Bureau of Economic Analysis reported that real (i.e., inflation-adjusted) GDP fell by 6.1 percent. This was the third consecutive quarter of contraction – a string that last occurred in 1974-1975 – and, in combination with the 6.3 percent drop in Q-4 of 2008, is the largest six-month drop since the late 1950s.
GDP’s decline was driven by a plunge in private investment (-51.8 percent), as businesses slashed inventories (-38.0 percent) and curtailed spending on equipment and software (-44.2 percent).
Government spending was also off, with defense down (-6.4%) while state and local governments cut back by 3.9 percent.
It was not all bad news, however. Real personal consumption expenditures rose by 2.2 percent, after having fallen sharply in the prior two quarters. Consumer spending accounts for about 70% of total GDP.
The improvement reflected a 6.2 percent jump in real disposable personal incomes. But the gain in after-tax incomes was attributable to the economy’s weakness, not growth. Employee compensation and investment income both declined as the economy weakened, but those reductions were more than offset by reduced personal taxes (-$193.5 billion) and increased transfers (e.g., unemployment insurance). An example of automatic fiscal stabilizers at work!
The Federal Reserve Board’s policymaking arm, the Federal Open Market Committee (FOMC), concluded its April meeting just after the release of the Q-1 GDP data. In its statement, the FOMC noted that “the economy has continued to contract, though the pace of contraction appears to be somewhat slower.”
This was evident in the Institute for Supply Management report that, while activity remained weak, the “decline in the manufacturing sector continues to moderate” as new orders rose for the fourth consecutive month. Similarly, the S&P/Case-Shiller home priceindex found that in March, for the first time in 16 months, housing prices fell nationally, but did not set a new record low!
Like Mr. Lincoln, the data aren’t out of sight, but they are a tad less homely.
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For more information, contact Patrick O’Keefe, director of economic research at J.H. Cohn, at pokeefe@jhcohn.com or 973-364-7724.