Yes Virginia. This Is A Recession.

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A preliminary report from the United States Department of Commerce, Bureau of Economic Analysis (BEA), claims American Current-dollar GDP -- the market value of the nation's output of goods and services – increased 3.15 percent or $111.0 billion in the first quarter of 2008 (versus the last quarter of 2007), to a level of $14,185.2 billion. That economic performance equates to an average annual year over year increase of 4.67% against Q1 2007.

The United States Labor Department, Bureau of Labor Statistics (BLS), reported an average annual increase in the rate of inflation (CPI-U) from Q1 2007 to Q1 2008 of 4.10%.

Real GDP growth from Q1 2007 to Q1 2008 was therefore (in the neighborhood) of .57%. Or to put it another way, although “Real” GDP growth in the first quarter of 2008 was very weak, the American economy is not in a recession.

Nonsense.

The declining value of the dollar increases the price of goods and services. It does not, however, increase the production of goods and services (which is what GDP is supposed to measure). Furthermore, a declining dollar inflates the price of goods and services purchased from foreign nations. In order to trust the BLS numbers, we have to believe they have not been inflated by the declining value of America’s currency.

Is that a good assumption?

Ok. For the sake of argument, let us assume the BEA made suitable adjustments for currency anomalies. Can we make the same concession for the inflation data published by the BLS?

No. People are not buying more. They are just paying more for what they buy. As I pointed out in my essay “CPI: Sophisticated Economic Theory, Terrible Ethics”, the BLS understates both the percentage of disposable income an “average” family spends on fuel and food, and the average prices for the fuel and food they buy. This has the effect of reducing the reported rate of inflation. Apparently the BLS believes high fuel and food prices are “temporary” and thus do not reflect the real world.

Tell that to a mother struggling to find enough money to buy food for her family and suddenly realizing she also has to buy gas with the little bit of cash that’s left in her purse.

Someone should tell the BLS. Farm prices are up. Higher consumer demand, coupled with decreased production due to crop failures and increasing production costs, have increased the competition for available food grains. Higher fertilizer, herbicide, insecticide and fuel costs will push up the price of commercial vegetables. Higher feed costs mean higher prices for meat animals, dairy products, poultry and eggs.

Preliminary April 2008 data shows a general easing of pricing pressures. Better weather and increased planting promises to increase the 2008 grain crop. But do not expect prices to come down to 2006 levels. World-wide competition for available agricultural products, coupled with higher production costs, means that people will have to allocate a larger share of the family budget for food. The UN’s Food and Agriculture price index is up over 150% from March of 2007 to March of 2008. Over a billion people are in danger of malnutrition or starvation. The competition for available food supplies will be intense for the foreseeable future.

And then there is the pain of rising fuel prices. American gasoline prices were up 32.5% in February 2008 versus February 2007. There is nothing going on in the international oil markets that would lead us to believe these prices will be coming down in 2008. Or 2009.

Except for one little glitch. If America slides further into recession, other nations will be drawn into America’s economic malaise. A world-wide recession will decrease the demand for oil, and weaken the pricing power of the producer nations. If the OPEC oil cartel fails to reduce available production, then oil prices will decline.

But not for long. The long term upward demand for oil assures there will be an increasing competition for a depleting commodity.

Higher food and fuel prices decrease the money families have available to spend on clothing, housing, recreation, and so on. Eventually, that shift of spending will mean declining employment and an even lower GDP.

In my essay “American GDP: Can We Trust The BEA Data?” (www.tce.name), I projected Q4 2007 inflation would exceed 5%, rendering a neutral or negative GDP. I am not aware of any data that would contradict that conclusion. After several hours of research, I have also concluded that Q1 2008 inflation was roughly 5.61%. If so, Q1 “Real” GDP was a minus .94%.

Yes Virginia. This is a recession.


TCE

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