…Shhh.

The economy continued to limp forward during the first quarter, according to the Commerce Department’s “advance” report on gross domestic product (GDP), which increased at an annual rate of 0.6 percent in the January-March period. That growth rate was identical to the slow pace experienced during the fourth quarter.

However, based on a related measure of economic activity — final sales of domestic product, which deducts the change in private inventories from GDP — the economy performed significantly worse during the first quarter. Final sales fell by 0.2 percent in the first quarter after rising by 2.4 percent during the fourth quarter. While the Commerce Department reported that the annualized increase in GDP during the first quarter was $17 billion (measured in constant 2000 dollars), more than 100 percent of that increase related to the net change in private inventories ($20 billion), which was equivalent to 0.8 percent of GDP. Thus, removing the change in inventories from GDP turns a GDP growth rate of 0.6 percent into a decline of 0.2 percent for final sales.

If the increase in inventories was unintended, as it appeared to be, then firms will likely reduce their output during the current quarter in order to return their inventories back to desired (lower) levels. Personal consumption expenditures, which have formed the backbone of the latest economic expansion, increased by only 1 percent during the first quarter. Meanwhile, business investment declined, falling by 2.4 percent.

Contrary to popular belief, a recession is not defined by at least two consecutive quarters of negative GDP growth. Indeed, the eight-month recession in 2001 did not include two consecutive quarters of declining GDP. In fact, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade.” So, the fact that GDP most likely increased during the first quarter does not preclude the onset of a recession.

Although the 2001 recession officially began in March, the NBER did not declare that a recession had begun until late November, which, it later turned out, marked the end of the 2001 recession and the beginning of the latest expansion. If the economy noticeably deteriorates over the next few months then the NBER will face a difficult situation. Will its Business Cycle Dating Committee be inclined to make a determination in September or October, during the heat of the presidential and congressional campaigns, that the economy officially entered a recession earlier this year?