Economy Down - Stocks Up
Kurt Brouwer April 29th, 2009
The Commerce Department released a preliminary report on the economy for the first quarter. As expected, economic output was down, falling by a 6.1% annual rate.
One of the biggest contributors to the decline was inventory reduction. Businesses slashed inventories by the biggest amount since records began in 1947. Though this hurt in the first quarter, it is a good sign that businesses were flexible enough to be able to cut their own purchases by that amount. It also sets up an inventory buildup later in the year as businesses began stocking those empty shelves.
U.S. Economy: GDP Shrinks in Worst Recession in 50 Years (Bloomberg, April 29, 2020, Bob Willis)
…Gross domestic product dropped at a 6.1 percent annual pace, weaker than forecast, after contracting at a 6.3 percent rate in the last three months of 2008, the Commerce Department said today in Washington. The report, which reflected a record slump in inventories and further declines in housing, comes hours before Federal Reserve officials decide how much money to pump into the economy.
Smaller stockpiles may set the stage for a return to growth in the second half of the year amid signs Fed efforts to reduce borrowing costs and unclog lending are starting to pay off. The contraction persisted even as lower gasoline prices and larger tax refunds helped bring an end to the worst slump in consumer spending in almost three decades…
Despite the dire news on the economy, stocks opened up quite a bit higher today. I try to avoid attributing a rise or fall in the stock market — a marketplace with millions of buyers and sellers — to one single factor like good news on banks as this piece does. Nonetheless, stocks opened up higher on a day when the economic news was not good. That alone makes it interesting.
One thing I did not like was the garbled comparisons throughout this piece — ‘the worst recession in 50 years’ or the ‘second-worst recession since the Great Depression’ or whatever. After a while all these comparisons become quite meaningless. I suppose journalists should be excused a little hyperbole in their writing, but I believe comparisons should be accurate and they should also be useful.
Here is a chart from the wonderful Calculated Risk blog that shows how far GDP has declined in this recession versus the cataclysmic decline during the Great Depression. This was done before Q1 results were in, but the estimate was very close:
Source: Calculated Risk
Calculated Risk had this to say about the chart [emphasis added]:
What is a depression? (Calculated Risk, March 10, 2020)
…The Great Depression saw real GDP decline 26.5%.
The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort - something that was celebrated - and is excluded when analysts call the current slump the “worst since the Great Depression”…
This post-World War II recession was a serious downturn that is often overlooked. It was sharp and severe as our war effort wound down and millions of men and women returned from the war. It was a deep recession that is largely ignored in all the media hype about this being the worst downturn since the depression. In this current recession, we have seen a cumulative decline of 3.3%. The post-WWII recession had a GDP decline of 13% — that is roughly four times the current one.
The economy contracted 26% during the Great Depression. That is nearly eight times the contraction we have had in this current recession. If you read that this contraction was roughly 1/8th of the Great Depression that would seem quite different, wouldn’t it? It would also have the virtue of being both accurate and useful in putting this downturn in perspective.
Bloomberg continues:
Stocks rose for the first time in three days as bank shares rallied on an analyst report that non-performing assets will peak this year. The Standard & Poor’s 500 Index was up 2.1 percent at 872.76 as of 10:50 a.m. in New York. Treasuries were little changed, with benchmark 10-year notes yielding 2.99 percent.
…The world’s largest economy has shrunk 3.3 percent since peaking in last year’s second quarter, already making this the second-worst recession since the Great Depression. GDP shrank 3.8 percent during the 1957-58 contraction, according to figures from the Bureau of Economic Analysis.
The next point is very interesting. It appears that consumer spending actually perked up considerably. That is quite a turnaround (see U.S. Consumer Confidence Jumps).
…Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, the most in two years. Purchases dropped at an average 4.1 percent rate in the last half of 2008, the biggest slide since 1980.
…“Most people are saying we could bottom out in the second half of the year, maybe in the third quarter, and then see positive growth again,” Christina Romer, the White House’s chief economist, said in a Bloomberg Television interview. “We’re certainly looking for some positive news towards the end of the year.”
Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947. Excluding the reduction, the economy would have contracted at a 3.4 percent pace.
I was in the grocery store recently and noticed the shelves were a lot emptier than usual. It could have been because people were stocking up, but even staples such as milk were in short supply and I doubt people stock up too much on things like milk. Holding lots of inventory costs money and businesses are clearly trying to be as lean as they can be.
…“This is one of those good-bad numbers,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said in a Bloomberg Television interview. “Businesses are running about as lean as they possibly can be. It sets up the reality that any sort of increase in demand will cause firms to have to increase production.”
As a result, Naroff predicted growth won’t “be nearly as bad in the current quarter, and will probably be reasonably good.”
Another source of the decline was a reduction in government spending. We have written about this before, but this piece also makes the point that state governments are cutting spending — and often raising taxes — at a very inopportune time. I believe states should build up reserves during the fat years so they can have some spending power in the lean years.
…One reason for the larger-than-projected decline in GDP was that government slashed spending at a 3.9 percent pace, the most since 1995. The drop reflected a cutback in defense spending and the biggest decrease in state and local government outlays since 1981, reflecting slumping tax revenue…
I believe this is the toughest stretch for the economy. Next quarter will probably also be down, but not nearly as much (see also Are We Talking Great Depression?).