Unexpectedly Intriguing!
31 July 2008

Not long ago, we asked if it were possible to have an economic recession without ever having the GDP growth rate drop into negative territory.

Thanks to today's revisions in previously reported quarterly GDP growth rates, we can now say we've had at least one quarter with negative GDP growth rates: the fourth quarter of 2007. We've modified our GDP bullet charts appropriately to show the latest data - the bullet chart on the left provides the one-quarter annualized GDP growth rates for 2007Q4, 2008Q1 and 2008Q2, while the bullet chart on the right provides the annualized GDP growth rates spanning the two-quarter periods ending with 2007Q4, 2008Q1 and 2008Q2, which span the previous 12 months:

One-Quarter GDP Growth Rates Bullet Chart, 2008Q2 Advance Two-Quarter GDP Growth Rates Bullet Chart, 2008Q2 Advance

The latest data shows that the annualized one-quarter GDP growth rate for 2007Q4 did indeed turn negative, coming in at -0.2%. Meanwhile, we see that the annualized two-quarter GDP growth rate for 2007Q4 dipped to 2.3%, the difference in the figures reflecting a sharply slowing economy.

Real (inflation-adjusted) GDP for 2008Q1 has been adjusted to be slightly lower than previously reported, coming in with an annualized one-quarter growth rate of 0.9% as opposed to the previously reported 1.0%. The two quarter annualized GDP growth rate for 2008Q1 is 0.3%, confirming a significant slowdown in the U.S. economy covering 2007Q4 and 2008Q1.

The current quarter comes in at higher levels, with a one-quarter growth rate of 1.9% and a two-quarter growth rate of 1.4%. This is consistent with a slowly growing economy. We also see this reflected in our bullet chart, as these growth rates fall into the "cool blue" portion of our economic growth "temperature spectrum." The temperature spectrum itself is based upon typical U.S. economic performance since 1980, which provides a means of visually comparing recent GDP growth against its historic performance in the modern era.

All in all, today's data revisions confirm what we already knew: the U.S. economy significantly slowed down in the last quarter of 2007 and has been slowly improving since. Once again, we're amazed at how well this performance has tracked Jonathan Wright's recession prediction model:

Forecast Recession Probability vs Applicable Date, 29 July 2005 through 29 July 2009

We can see in the chart above that the highest probability of recession was established during the fourth quarter of 2007, with heightened probabilities that the U.S. would be in recession extending through the end of April 2008. We are now in a period where the probability the the U.S. will be found to be in recession is receding rapidly.

Finally, we can also confirm that First Trust's Brian Wesbury's optimistic forecast for 2008Q2 was very likely too optimistic. As we've seen from today's GDP revisions, the data may change.

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