Economic markers

OPINION:

Whether the economy has already succumbed to recessionary forces or will do so in the near future or will avoid a recession altogether, four points should be indisputable.

First, like the 2001 tax cut, the recently enacted economic-stimulus package was well timed — unlike many countercyclical fiscal policies adopted in the more distant past. By the end of May, households are expected to receive an estimated $50 billion of the $110 billion in total tax rebates. Rebates up to $1,200 per household began arriving on April 28, two days before the Commerce Department reported that the economy’s annual growth rate was a minuscule 0.6 percent (January-March) for the second quarter in a row.

Second, the economy should benefit from the ongoing stimulative effect from the Federal Reserve’s timely short-term interest-rate reductions. Even if the Fed has paused in its rate-cutting phase after lowering the interbank overnight rate to 2 percent on April 30, the economy will continue to benefit from a 2-percentage-point reduction, which occurred over an eight-week period ending on March 18 and whose effects will continue rippling through the economy with the customary monetary-policy lags.

Third, while the annualized growth rate of 0.6 percent was the same for both the October-December and January-March periods, the components of growth were markedly different and significantly more worrisome during the first quarter. Specifically, without an unintended change in inventories equal to 0.8 percent of gross domestic product (GDP) in the first quarter, the overall growth rate would actually have been negative. Also, all components of fixed investment (residential investment and business investment in both structures and equipment/software) were negative last quarter. Consumption spending on durable goods declined by 6.1 percent during the first quarter after increasing by 2 percent during the fourth, and spending on nondurable goods declined by 1.3 percent after rising by 1.2 percent. After contributing more than 1 percentage point to the fourth quarter’s overall growth rate of 0.6 percent, the net-exports growth component declined to 0.2 percent in the first quarter.

Fourth, measured on a fourth-quarter-over-fourth-quarter basis, which captures economic growth during any given year, it is virtually certain that the growth rate of GDP will have declined for the fifth year in a row, falling from 3.7 percent in 2003 to 3.1 percent in 2004 to 2.9 percent in 2005 to 2.6 percent in 2006 to 2.5 percent in 2007 to who knows what in 2008.