Friday, July 30, 2010

Revisions: Real GDP and PCE well below previous peak

by Bill McBride on 7/30/2010 11:32:00 AM

Error Correction: Sorry - I confused annual rates and quarterly rates.

Real GDP is 1.1% below the pre-recession peak, so if GDP would have to grow at 4.4% in Q3 the economy to be back to the pre-recession level.

Real PCE is 0.85% below the pre-recession peak, so PCE would have to grow at 3.4% in Q3 to be back to the pre-recession level.
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These two graphs show the revisions for real GDP and PCE.

GDP revisions Click on graph for larger image in new window.

The recession was clearly worse than originally estimated (we suspected this already using Gross Domestic Income).

In fact real GDP in Q2 2010 was lower than originally reported for Q1 2010. And annualized real GDP is still 1.1% below the pre-recession peak. This means that real GDP would have to grow at a 4.3% rate over the next quarter to reach the recession peak.

This shows that St Louis Fed President Bullard was too optimistic in a speech last month. From Bullard in June: The Global Recovery and Monetary Policy

"As of the first quarter of 2010, real GDP stands just shy of the 2008 second quarter level, so that growth of about 1.25 percent would be sufficient to allow real GDP to surpass the previous peak. At that point, the U.S. economy would be fully "recovered" from the very sharp downturn of late 2008 and early 2009. To be clear, the 1.25 percent is a quarterly number, and would be 5.0 percent at an annual rate. Although I think that 5.0 percent at an annual rate is too much to expect for current quarter real GDP growth, it seems like a reasonable possibility over the next two quarters combined. Given these conditions, I expect the U.S. recovery in GDP to be complete in the third quarter of this year."
I disagreed with him, and pointed out that GDI suggested downward revisions.

PCE revisionsReal PCE was revised down even more.

Annualized real PCE is now 0.85% below the pre-recession peak, and would have to grow 3.4% over the next quarter to reach the previous peak.

Cleveland Fed President Sandra Pianalto had it right in February: When the Small Stuff Is Anything But Small
[I]t may take years just to get back to the level of output we enjoyed in 2007, just before the economic crisis began.
If things go well, the economy will be back to pre-recession levels later this year or in 2011. No wonder there is so little investment. And no wonder there is so little hiring!

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