White House CEA Chairman Ed Lazear expressed confidence to the Wall Street Journal today that the country is not in recession. I, like Menzie Chinn, am surprised that Lazear is willing to put his reputation on the line in this way.
It is true that the Commerce Department BEA’s advanced estimate of first-quarter GDP growth was still above zero (+0.6%). But there are three reasons not to take this number too seriously.
(1) Revisions in these numbers are usually substantial, so the final number could easily turn out to be negative — or twice as high.
(2) Even if the +0.6% number were to hold up, it can be entirely accounted for by measured inventory investment. In other words, real final demand fell rather than rose in the first quarter. It is plain that this inventory accumulation was not the outcome of deliberate decisions by bullish firms to add to their inventories in anticipation of a booming economy. Rather it was almost certainly unintended inventory accumulation, as goods sat unsold on store shelves and in warehouses. This overhang makes it more likely that inventory accumulation will be negative in the 2nd quarter. (Admittedly, rising exports from the weak dollar and rising consumption from the tax rebate checks could outweigh that particular factor, and we could scrape along the ground for another quarter at near-zero growth).
(3) As Martin Feldstein has been pointing out (e.g., in the FT), it is a misinterpretation of the GDP statistics to say that growth remained positive in the first quarter. Rather GDP for QI as a whole was estimated to have been 0.6% higher as compared to QIV as a whole. The Commerce Department does not report monthly GDP estimates, but MacroAdvisers does, and these data suggest that monthly GDP has been declining since January.
While some aspects of the subprime mortgage crisis were predictable, the freezing up the most liquid risk-free markets in the world was not. The illiquidity has been especially striking in the interbank market. The following chart was kindly made available by the