Cezary Salad

The good news: by the official measure of a recession as two consecutive quarters of negative GDP growth, we are not in a recession yet. Today the Bureau of Economic Analysis reported advance first-quarter advance real GDP growth of .6% - over the half point mark, beating consensus (check out the news release here).

The bad news: the economy is definitely weakening, and we don’t need to call it a recession in order to feel its effects. Anemic growth of .6% - same as 4Q 2007 - is weak enough that it could turn negative on future revisions since the average revision to real GDP (without regard to sign) from advance release to final is .6%. And regardless of whether it does actually turn negative, we know already that the economy isn’t growing as fast as it used to and we can see and feel its effects on our pocketbooks, unemployment and spending (all of which have taken a beating from economic indicators in the last few months).

What more, real GDP in the first quarter stayed positive largely thanks to real change in private inventories, which added .81% to the GDP figure - not a particularly strong vote of confidence in the economy since unsold inventories indicate weakness in consumer spending. The BEA also cited “positive contributions from personal consumption expenditures (PCE) for services” and “exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods.” Additionally, “imports, which are a subtraction in the calculation of GDP, increased.”

Thus, while we may have steered clear of the of making the dreaded r-word official, there was really little to celebrate in the GDP report, and today’s FOMC statement accompanying the Fed’s 25 basis point decrease reflected this:

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”

The Fed also gave a very strong hint that it is likely to take a step back and examine the impacts of its policies to date before it moves forward with further rate cuts:

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

Translation: “we’ve done a lot so far and it should have an impact, so let’s wait and see.”

And so we wait for more good news next time - hopefully without the bad.

Are we in a recession?

Today, the National Bureau of Economic Research (NBER) - the official research group tasked with dating when a recession begins and ends - will get its first hint of whether the U.S. is in a recession. That’s because at 8:30am, the Bureau of Economic Analysis will publish its first-draft figures for chain-weighted U.S. GDP growth for the first quarter of 2008. Given all the speculation that we have heard in the financial press about whether or not the country is about to enter into, or is already in, a recession, this will definitely be the figure to watch, so don’t miss it. What will it look like? To be sure, the actual chain-weighted GDP release over the past few quarters has looked nothing if not volatile (see below).

However, here are some hints of what the market is expecting:

• The consensus estimate for 1Q08 annualized GDP growth published by the IDEA group, a market intelligence provider, is an anemic but above-negative .3%
• As of yesterday afternoon, Bloomberg placed the average of 80 economist estimates at .4%, with a distribution slightly skewed toward higher growth (.5% median, -.8% low, 1.5% max)

Digging a little deeper, 2007 has thus far posted negative growth in three sectors: construction (-12.1%) and finance/insurance (-.3%), which were a related phenomenon due to the subprime bubble, and nondurable goods (-1.1%).

The question is thus whether the strong contraction in the housing market and the financial services sector continued into the first quarter of 2008 without being sufficiently offset by stronger growth in other sectors to prevent the overall economy from dipping into negative growth.

As you can tell from the consensus estimates, most economists don’t seem to think so. We’ll know for sure in the next few hours, so get ready for an exciting day on Wall Street because if the GDP does indeed stay out of the red then this will be a day to remember.