So Q2 GDP wasn’t a complete disaster; that was left for Q1. Even at 1.7% (intangibles and imputations everywhere) the string of GDP fragility is deafening, particularly in the face of the combined psychology of QE 3 & 4. Since Q2 2012 was revised significantly higher, I can no longer officially proclaim that GDP growth has been at or under 2% for five of the last six quarters, but I can point to four of the last five under 1.7%; including three quarters below 1.2%.

That raises the issue of “stall speed”; the rate at which growth can no longer maintain forward momentum and rebound to avoid recession. In other words, where is the point of no return once GDP begins a downward trend?

The Federal Reserve’s economists took time to study exactly this concept only a few years ago. What they found, first, was that GDI appeared to be a “better” measure of changes in trend (“better” meaning more statistically useful in predictive modeling). Second, GDP growth of 2% was a universal demarcation where recession would be indicated.

Q/Q growth, however, was not robust enough to determine whether or not stalling was indicated by GDP. There were too many “false positives” shown by such short-term changes. The best indicator was 4-quarter growth; this makes intuitive sense because recessions are not, contrary to conventional economics, due to one-off shocks, but rather are processes that get embedded, expanded and reinforced over the course of some time.

ABOOK July 2013 GDP Stall Speed

On a four quarter basis, there is no ambiguity in the data going back to 1948 – below 2% equals recession.

As of this morning’s figures, which will no doubt be revised significantly, the four quarter GDP growth rate is 2.9%. However, that is the nominal rate so, depending on your inflationary choice of both definition and means of measurement, it is almost certain real GDP is below the stall speed as of Q2. If inflation is assumed only to be near 2% (and is likely higher on a real basis away from hedonics and imputations), four quarter real GDP growth has been below 2% for the past three quarters.

ABOOK July 2013 GDP Stall Speed Current

Despite any quarrels over the estimation of inflation, there is no doubt, given the assumption of such low inflation, that the past three quarters have been beneath “stall speed” in congruence with the Fed literature. That is further confirmed by comparison to previous recessions in a “low inflation” environment.

ABOOK July 2013 GDP Stall Speed Comps2

The study cited above examined both the “final” GDP release and the subsequent “benchmark revisions” to those “final” numbers, finding that even the estimates that are released before the massive benchmark revisions (like today’s) conform to the “stall speed” interpretation. That means there is enough negative information contained in even the “incomplete” GDP statistics to inform us of impending recession.

The major revisions, then, simply determine the depth and scope of the contraction long after it has occurred. So GDP may after all have some use in real time, though how much is still a question, but severity estimations will have to be left to other concurrent indications and accounts.

If the “stall speed” study is at all correct, and history does indeed concur with the concept, then these continued pronouncements for a better second half in the economy are little more than wishful thinking and hope. Given that economists’ models are far more sensitive to “stimulus” than real people, it all amounts to the same thing – an inability to see trends that are becoming even more obvious by the quarter.

 

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