The Horror of the Shrinking Economy!
The Drudge Report headline, all day, was: It Shrinks! The word “it†refers to the economy, and the headline went up shortly after the Bureau of Economic Analysis (BEA) announced that third quarter GDP declined. Yes, we’re in the fourth quarter, but that’s not the point.
Naturally, the news cycle was filled with proclamations of economic gloom. One story noted “The U.S. economy contracted in the third quarter, marred primarily by the weakest consumer spending in nearly three decades, the Commerce Department reported Thursday.†Another report waxed “The U.S. economy suffered its sharpest contraction in seven years in the third quarter as consumers cut spending and businesses reduced investment at the onset of what may be a severe and long-lasting recession.â€
Maybe we’ll get somewhere down the road and find out all of this is true. But what none of these stories mentioned was that the new BEA numbers are “advanced†estimates. In fact, an updated set of estimates will be available at the end of November. These updated estimates are deemed “preliminary.†That’s right, today’s numbers are pre-preliminary. (It’s all in the BEA release.)
Eventually, we’ll get the “final†estimates. The first two releases are based on incomplete data and are subject to revision – sometimes in the other direction. But why let something like this get in the way of great headlines?
If the numbers remain the same after their upcoming revisions, then one of the key contributors to our economic malaise will have been that durable goods purchases decreased by 14 percent in the third quarter. The largest decrease within the durables category was “motor vehicles and parts.†I’m not sure what to make of quarterly decreases like these, though, because common sense tells us that these numbers will not constantly rise.
Individuals can only buy so many new cars and refrigerators. The chances that most consumers won’t have to buy a new item in the same quarter, at least once in awhile, seem to be pretty good. Regardless, my ability to earn income, produce goods or services, and purchase goods or services, cannot be accurately predicted by whether I purchased a car last quarter. Why should the aggregate information in GDP be any different?
NM