Saturday, January 16, 2010

Krugman: Curb your enthusiasm

by Bill McBride on 1/16/2010 06:21:00 PM

As a followup to my previous post, Professor Krugman points out that Q1 2002 GDP growth1 was originally reported as 5.8% with rising unemployment. Good point.

Although Q1 2002 GDP growth was later revised down to 3.5%, it is another good example of a "GDP blip" driven by changes in inventory (inventory changes added 2.63% to the final 3.5%), with weak underlying demand (PCE was 1% in Q1 2002 - and stayed weak into 2003).

Krugman notes "at the time there was much unwarranted celebration (unemployment didn’t peak until summer 2003)."

I expect some unwarranted celebration this time too - and the unemployment rate to continue to increase.

Note: I don't have a crystal ball, but I'm not just being bearish - I called the 2nd half recovery in GDP pretty early and I've been consistently concerned about 2010.

1GDP growth refers to the headline BEA number. That is the seasonally adjusted annualized real rate of GDP growth.

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