There's suddenly lots of talk about the possibility of a "double dip" recession, as if the economy had ever really emerged from the last downturn.
Yves Smith over at Naked Capitalism does a good job of putting the talk in perspective today. In fact, the discussion is ultimately about semantics.
And another blogger, at Calculated Risk, points to the fundamental problem here while questioning whether St. Louis Fedster James Bullard is too optimistic about where the economy stands at present.
At issue is what we mean when we talk about Gross Domestic Product. The fact is that the advance estimate that the Bureau of Economic Analysis puts out a month after the end of each quarter does not include a version based on income but only one based on expenditures. Yet the advance estimate gets much more attention than the BEA's subsequent revisions, which do include data on income.
And as a recent study by Federal Reserve economist Jeremy Nalewaik points out, GDP based on expenditures has long been a less accurate indicator of the business cycle than the one based on income (or GDI in the Fed's nomenclature), which is hardly surprising given the lack of job growth in recent years.
And the report says that advance estimate has overestimated GDP during the recession. Wrote Nalewaik: "GDI currently shows the 2007-2009 downturn was considerably worse than is reflected in GDP."
And the economist says many analysts as a consequence mistakenly concluded that the recession had ended based on trends in GDP estimates that included only expenditures.
Last spring, Nalewaik observed, "a conventional wisdom was emerging that the recession likely ended late in the second quarter of 2009, perhaps in June, with the economy resuming growth in 2009Q3."
Yet the economist found that while there was a modest a modest rebound in GDP based on expenditures that quarter, there was no evidence of a rebound in GDP based on income. "Personal income less transfer payments and employment-two of the four indicators most emphasized by the NBER business cycle dating committee-continued to decline in 2009Q3," he wrote, referring to the National Bureau of Economic Research.
No wonder the committee, if not analysts like James Cramer, has yet to call the end of the recession.
The Fed report recommends that the BEA include data of GDP based on income in its advanced estimates and that it do a better job of disclosing it in its two subsequent revisions of its estimate each quarter.
I would recommend that analysts do a better job of focusing on GDP based on income whenever it is disclosed.