US GDP dives 6.2% in 4th quarter

[Michael]

Following on a 3.8% drop in GDP the third quarter, the US economy contracted by 6.2% in the forth quarter of 2008 (numbers given are 'annualized). :eek:

In both cases the contraction was much worse than the expert's forecast.

Source (http://www.washingtonpost.com/wp-dyn/content/article/2009/02/27/AR2009022700884.html?hpid=topnews)

As a general rule, when the economic numbers are coming in worse than the consensus prediction of various experts, that means the economy is still getting worse and there's no end in sight.

I do find it odd that none of these 'so-called experts' are able to demonstrate any actual 'expertise', but that's beside the point I guess. Lets just say that GDP contraction is only the lastest economic figure to come in substantially worse than the consensus view of the 'worse-case' scenario predictions.

This is really, really ugly. Even the 'bearish' forecasters are coming up short!

[partofme]

It makes it almost too depressing to even think about looking at a newspaper. Every day the headline should read "It's even worse than we thought or you thought only yesterday".

[Dominick]

Okay, explain something to me, please. GDP's have been continually growing for a few decades. So, at a time not so long ago, a few years at most, the GDP was exactly what it descended to now. I don't quite recall that period being a borderline Third World situation. Why is the same situation bad today when it was A-ok a few years ago ?

[Michael]

Okay, explain something to me, please. GDP's have been continually growing for a few decades. So, at a time not so long ago, a few years at most, the GDP was exactly what it descended to now. I don't quite recall that period being a borderline Third World situation. Why is the same situation bad today when it was A-ok a few years ago ?
Because of population growth and immigration over time, there are way more people in the USA for that same amount of economic activity is divided amongst. Thus, there is less for everyone.

The key point is that wth the economy contracting at the present rate, the US economy would hit 'absolute zero' within fifteen years or so.

And one more quarter of this kind of contraction and we're going to be looking at a 'deflation' scenario.

[Dominick]

Because of population growth and immigration over time, there are way more people in the USA for that same amount of economic activity is divided amongst. Thus, there is less for everyone.
Let's look at the actual numbers. The GDP-PPP for 2007 was $13.86 trillion*. That gave a GDP/capita of $46,000*. Let's say that 2007 figure shrunk by 6.2 % resulting in $13 trillion. Meanwhile the population increases by approx. 1%*. This would result in a new GDP/capita of 42,718. (*All data from http://www.indexmundi.com/united_states/).
That is the GDP/capita of mid 2006.
So again, what's the big deal ? Mid 2006 wasn't exactly an age of desperation.


The key point is that wth the economy contracting at the present rate, the US economy would hit 'absolute zero' within fifteen years or so.
Being mathematically challenged is one thing, but this is worse :D A decrease of 100 by 6.2% over 15 years results in 38.287, not in 0.


And one more quarter of this kind of contraction and we're going to be looking at a 'deflation' scenario.
So ?

[partofme]

Let's look at the actual numbers. The GDP-PPP for 2007 was $13.86 trillion*. That gave a GDP/capita of $46,000*. Let's say that 2007 figure shrunk by 6.2 % resulting in $13 trillion. Meanwhile the population increases by approx. 1%*. This would result in a new GDP/capita of 42,718. (*All data from http://www.indexmundi.com/united_states/).
That is the GDP/capita of mid 2006.
So again, what's the big deal ? Mid 2006 wasn't exactly an age of desperation.


Being mathematically challenged is one thing, but this is worse :D A decrease of 100 by 6.2% over 15 years results in 38.287, not in 0.


So ?

Well the problem is that in a recession you not only have people that are losing their jobs because of it but you create a fear among everybody else that they might so they cut back in their consumption as a precaution in case they do which means less demand for goods in services which in turn leads businesses to let even more workers go. It goes through a vicious cycle where worry about losing a job leads to decisions that end up costing the economy jobs as a whole. In the end for those that keep their jobs they may end up better off at the end of the downturn because they got in a habit of being more frugal and saved a little but for millions it means they lost their income or had to replace the jobs they lose with ones that pay less or give them fewer hours. Unemployment is bad enough but what hurts many people is underemployment when their hours get cut or they end up with a job that pays less.

[Michael]

Let's look at the actual numbers. The GDP-PPP for 2007 was $13.86 trillion*. That gave a GDP/capita of $46,000*. Let's say that 2007 figure shrunk by 6.2 % resulting in $13 trillion. Meanwhile the population increases by approx. 1%*. This would result in a new GDP/capita of 42,718. (*All data from http://www.indexmundi.com/united_states/).
That is the GDP/capita of mid 2006.
So again, what's the big deal ? Mid 2006 wasn't exactly an age of desperation.
Those numbers you give represent a national rate of contraction equal to a 10% drop in GDP per capita for this year. :eek:

That's the rate of contraction and the trend is a very nasty downward slope (-3.8% in 3Q2008, now -6.2% in 4Q2008). The trend projection there is very ugly.

Being mathematically challenged is one thing, but this is worse :D A decrease of 100 by 6.2% over 15 years results in 38.287, not in 0.
It was not my intention to assert that a -6.2% rate of contraction mathematically produces a zero result in 15 years. Rather that it does so in a comparative economic sense. Negative 6.2% growth in GDP every year for 10-15 years would turn our world upside down in a very ugly way that is beyond the relative comparison of any historical period (except perhaps 1350s Great Plague type wipeout).

So ?
Well, to put it bluntly, the only thing worse for our modern society than capitalism growing is capitalism shrinking. And I mean that in every sense of the word. Modest stagnation is much preferable to contraction/deflation!

I share your desire for 'improvement' in the world, but I'm not liking the prospects of having to go through a 'Mad Max' phase like starting next week. :eek:

[Dominick]

Well the problem is that in a recession you not only have people that are losing their jobs because of it but you create a fear among everybody else that they might so they cut back in their consumption as a precaution in case they do which means less demand for goods in services which in turn leads businesses to let even more workers go. It goes through a vicious cycle where worry about losing a job leads to decisions that end up costing the economy jobs as a whole. In the end for those that keep their jobs they may end up better off at the end of the downturn because they got in a habit of being more frugal and saved a little but for millions it means they lost their income or had to replace the jobs they lose with ones that pay less or give them fewer hours. Unemployment is bad enough but what hurts many people is underemployment when their hours get cut or they end up with a job that pays less.
The bolded bit is where I wanted to go here :)
It's fearmongering, that's what it is. And everyone is contributing to it. We've gone from upwards hysteria to downwards hysteria. There is a mid 19th century book by Charles Mackay called Extraordinary Popular Delusions and the Madness of Crowds that describes similar historical events (the South Sea Bubble (http://en.wikipedia.org/wiki/South_sea_bubble), Tulipomania (http://en.wikipedia.org/wiki/Tulipomania) to name a few).
And the last two decades would be very suitable for a new chapter or two in it.

Have people already forgotten that a year or two ago not even the sky was the limit ? That there were in fact no longer any economic models that even considered the possibility of deflation ? And a mere 24 months later the End of the World is Nigh ? We're witnessing global mass hysteria here.

This is rhetorical, partofme, not suggesting that you think like that. :)

[Dominick]

Those numbers you give represent a national rate of contraction equal to a 10% drop in GDP per capita for this year. :eek:

That's the rate of contraction and the trend is a very nasty downward slope (-3.8% in 3Q2008, now -6.2% in 4Q2008). The trend projection there is very ugly.
Again, so ? Linear extrapolation of a downward trend is as meaningless as the previous extrapolation of the upward trend was. Yesterday (see also previous post) it could never go down again and today it can never get up again ?
Again, that 10% contraction brings us back to mid 2006, not to the Dark Ages.


It was not my intention to assert that a -6.2% rate of contraction mathematically produces a zero result in 15 years. Rather that it does so in a comparative economic sense. Negative 6.2% growth in GDP every year for 10-15 years would turn our world upside down in a very ugly way that is beyond the relative comparison of any historical period (except perhaps 1350s Great Plague type wipeout).
See above. There is no more reason to project that trend over 10-15 years than there was when it was going up.


Well, to put it bluntly, the only thing worse for our modern society than capitalism growing is capitalism shrinking. And I mean that in every sense of the word. Modest stagnation is much preferable to contraction/deflation!

I share your desire for 'improvement' in the world, but I'm not liking the prospects of having to go through a 'Mad Max' phase like starting next week. :eek:
Was there a Mad Max phase in mid 2006 ? Nope. You too are smitten with the end-of-the-world virus :D

[partofme]

The bolded bit is where I wanted to go here :)
It's fearmongering, that's what it is. And everyone is contributing to it. We've gone from upwards hysteria to downwards hysteria. There is a mid 19th century book by Charles Mackay called Extraordinary Popular Delusions and the Madness of Crowds that describes similar historical events (the South Sea Bubble (http://en.wikipedia.org/wiki/South_sea_bubble), Tulipomania (http://en.wikipedia.org/wiki/Tulipomania) to name a few).
And the last two decades would be very suitable for a new chapter or two in it.

Have people already forgotten that a year or two ago not even the sky was the limit ? That there were in fact no longer any economic models that even considered the possibility of deflation ? And a mere 24 months later the End of the World is Nigh ? We're witnessing global mass hysteria here.

This is rhetorical, partofme, not suggesting that you think like that. :)

No worries. ;)

[phungus420]

Have people already forgotten that a year or two ago not even the sky was the limit ? That there were in fact no longer any economic models that even considered the possibility of deflation ? And a mere 24 months later the End of the World is Nigh ? We're witnessing global mass hysteria here.
The people I discuss economics with have been expecting this since 2003. So, yeah, I suppose that the talking heads on TV were saying everything was OK, but from my viewpoint, my social circle has been calling them idiots for years now.

And to be honest, the economy, is as bad as the news is making it out to be, if not worse.

[Sucre]

Because of population growth and immigration over time, there are way more people in the USA for that same amount of economic activity is divided amongst. Thus, there is less for everyone.

The key point is that wth the economy contracting at the present rate, the US economy would hit 'absolute zero' within fifteen years or so.

And one more quarter of this kind of contraction and we're going to be looking at a 'deflation' scenario.
What do you call "absolute zero" ?

[Sucre]

Okay, explain something to me, please. GDP's have been continually growing for a few decades. So, at a time not so long ago, a few years at most, the GDP was exactly what it descended to now. I don't quite recall that period being a borderline Third World situation. Why is the same situation bad today when it was A-ok a few years ago ?
I tend to agree with you : there is something "abstract" in these figures. However, in the real world, such a sharp decrease does mean that many people lose their job, sell their house and that sound companies file for bankrupcy because less sound companies cannot pay them.

Reg. economics and standard of living, we will learn to live at a lower level without even realizing it.

[Sucre]

The bolded bit is where I wanted to go here :)
It's fearmongering, that's what it is. And everyone is contributing to it. We've gone from upwards hysteria to downwards hysteria. There is a mid 19th century book by Charles Mackay called Extraordinary Popular Delusions and the Madness of Crowds that describes similar historical events (the South Sea Bubble (http://en.wikipedia.org/wiki/South_sea_bubble), Tulipomania (http://en.wikipedia.org/wiki/Tulipomania) to name a few).
And the last two decades would be very suitable for a new chapter or two in it.

Have people already forgotten that a year or two ago not even the sky was the limit ? That there were in fact no longer any economic models that even considered the possibility of deflation ? And a mere 24 months later the End of the World is Nigh ? We're witnessing global mass hysteria here.

This is rhetorical, partofme, not suggesting that you think like that. :)
Yes, fearmongering is what it is but do not forget that psychology is a sound - and badly studied - part of economics.

We have heard both messages : on the one hand the Wall Street arrogant right wingers who bragged American superiority and on the other hand the leftist intellectuals sending warning messages and writing long books on the subject for the last ten years at least.

We knew that the Americans were living on credit, borrowing heavily from the rest of the world but making the rest of the world dependant on their level of comsumption, we knew that the US Trade deficit had already reached not the sky but the deepness of hell, we knew that the financial system was completely disconnected from the real economy, some people might have known that it was under-regulated, we knew that globalisation raises the income of a few while the income of the middle class stagnates at best if not decreases and the poorer become poorer, a few bubbles have burst in the recent past and all serious economists know how Bubbles come to be and what Supercycles and economic waves are (Did you know that Kondratiev got was sentenced to the Russian gulag and excuted because his thesis did not fit the Soviet adminisration ?).

In any case, we knew all this but denied it at a conscious level and went on shopping (at least I did :D). And now "The Time has Come" - This is the End of the World we were all waiting for. Not surprising there is an hysteria.

[Michael]

What do you call "absolute zero" ?
I was suggesting that a rate of 6.2% contraction if continued wouldn't take more than 10-15 years to turn our economy into something similar to Mad Max.

Though of course, this rate of contraction isn't likely to continue for that period, I was only trying to explain to Dominick how serious such a contraction is.

[Michael]

Have people already forgotten that a year or two ago not even the sky was the limit ? That there were in fact no longer any economic models that even considered the possibility of deflation ? And a mere 24 months later the End of the World is Nigh ? We're witnessing global mass hysteria here.
I don't see any hysteria anywhere yet.

As for the 'impact', your numbers suggest a 10% drop in average income. Now keep in mind that for three-quarters of the population, there probably is no income drop at all. That means the drop in income is going to be overwhelmingly concentrated with one segment of the population suffering a 50% or 75% drop in income.

In other words, that kind of contraction indicates millions of people losing their jobs. And people who lose their jobs often lose their houses and/or go bankrupt soon enough - especially in a recessionary market where there are no 'new' jobs to replace the lost ones.

[Michael]

Yes, fearmongering is what it is but do not forget that psychology is a sound - and badly studied - part of economics.
It is increasingly being studied.

...we knew that globalisation raises the income of a few while the income of the middle class stagnates at best if not decreases and the poorer become poorer...
Actually, this result is quite an unexpected development and runs counter to classical economic theory. Traditionally speaking, free trade produces mutual benefits (it has in the past done so).

That the latest round of globalization corresponds with a period of increased wage inequality does not necessarily imply corelation. Globalization may be the 'cause' of rising wage inequality, but I don't think there is enough data to support this.

In other words, we're not certain what has caused rising wage inequality over the last 25 years. Globalization may be the culprit, but likely as not, it isn't.

Indeed, globalization has been raising wages throughout the 3rd world - which is exactly the result one ought to expect from globalization. That this period has also seen stagnation of average wages in 1st world countries is not necessarily the same process. They may be related, or they might not be. I think there are several other more likely explanations for the stagnation of average wage levels in 1st world countries.

[Sucre]

Globalisation per se may not be the culprit, but certainly the way it was carried out. Raising incomes in the third world did not make up for dropping income in this part of the third world which was stuck in the 19th century version of globlisation (I am thinking of Africa).

The times when Adam Smith was praising free trade are long past : his world was a very different world. There must be a difference between free trade amongst nations which are more or less equal in economic and cultural tems, enabling competition and exchange of services, and globalisation when competion is not possible.

The European Union v. Industry Nations / Africa.

I am all for the European Union but what we are doing with Africa are 19th century methods in new disguises : there are only Winners and Losers.

Present globalisation is a mixture of these two situations.

The advantages are not that straightforward anyway. I was reading this morning an article about the collapse of Ireland. International corporations are egoistic : they may promote the economy of a country by providing jobs, benefiting from low labour costs, this has been the case in Ireland, but as soon as salaries raise due to rising living standards and expectations, these corporations chose to move out in another country where labour costs are lower. Unemployment rises ... and ultimately salaries drop again. After a while we're back where we were at the start and only stake holders have benefited from the sitation.