Saturday, July 18, 2009

Slip Sliding Sideways

by Calculated Risk on 7/18/2009 10:53:00 AM

Here is a graph from Jan Hatzius at Goldman Sachs (no link):

Goldman Sideways Click on graph for larger image in new window.

The graph shows the end of cliff diving for retail sales, auto sales, home sales, and capital goods orders - but so far no recovery.

But GDP can still turn slightly positive.

Here is a speech from San Francisco Fed President Janet Yellen in March: The Uncertain Economic Outlook and the Policy Responses.

[I]t takes less than many people think for real GDP growth rates to turn positive. Just the elimination of drags on growth can do it. For example, residential construction has been declining for several years, subtracting about 1 percentage point from real GDP growth. Even if this spending were only to stabilize at today’s very low levels—not a robust performance at all—a 1 percentage point subtraction from growth would convert into a zero, boosting overall growth by 1 percentage point. A decline in the pace of inventory liquidation is another factor that could contribute to a pickup in growth. Inventory liquidation over the last few months has been unusually severe, especially in motor vehicles—a typical recession pattern. All it would take is a reduction in the pace of liquidation—not outright inventory building—to raise the GDP growth rate.
emphasis added
This is a very important point for forecasters - to distinguish between growth rates and levels. Even if the economy has bottomed, it is at a very low level compared to the last few years, and the recovery will probably be very sluggish.