U.S. Growth Before the Collapse

December 23, 2008

Final revised figures show a 0.51% annualized drop of real GDP in the third quarter, as a negative 3.54 percentage point  (ppt) drag from personal consumption (off 2.75 ppts) and investment (-0.79 ppts) was mitigated by net exports (+1.15 ppts), government spending (+0.84 ppts) and unplanned inventory building (+0.84 ppts). GDP still eked out a 0.7% rise from 3Q07. The third quarter ended with a substantial additional deflationary thrust from the bankruptcy of Lehman, although a 3.8% annualized drop in consumption was a portent of worse to come even if Lehman had not been permitted to fail. Speaking on Bloomberg radio this morning, former Fed Governor and respected economist Laurence Meyer projected a 6.5% annualized decline of GDP in the current quarter, which would be the greatest drop since -7.8% in 2Q80 and a rise next year in the U.S. jobless rate to around 8.5% from 6.7% currently.

The recession did not immediately follow a period of excessive growth. In the seven years to and including 2007, real GDP expanded as much as 3.0% only in calendar 2004 (3.6%) and averaged 2.3% for the period, about a percentage point less than the long-term trend. During the previous seven years, by contrast, GDP expanded 3.9% per annum and by 4.something percent in four different years including three in a row. An extensive period of sub-trend growth this decade following the go-go 1990’s falsely lulled many analysts, including the Greenspan Fed, into believing that a soft landing was probable. The lesson of this experience is that central bankers ignore asset markets at great peril, although that conclusion would still draw many opponents.



One Response to “U.S. Growth Before the Collapse”

  1. Kenny O'Neil says:

    The citizens follow the government’s example – spend, spend, spend and somehow we’ll print more, take more loans, max out the equity of our homes … but who elected the government? There is a price to pay for such irresponsible business management / personal business management. What if any company listed in the USA stock market behaved like this? The problem going forward ‘I hear’ is the impending wave of commercial paper collaps, loan defaults up and coming in Q1 09′. The price to pay for living off fake money is looking to be a steep one.