The BEA released their final estimate for GDP last week, stating that GDP increased 1.7% on a year-over-year basis. This is roughly 10 basis points better than prior estimates and 20 basis points than the initial estimate. As you may already know, I think one can discern the risks of recessionary conditions based on the trend and level of year-over-year changes in GDP. Essentially, the risks of the recession are high when year-over-year GDP is at below 1.5% after falling from a higher level. The following chart shows this relationship, with the blue line representing the percentage change in GDP and the red line being the 1.5% demarcation. The chart is sourced using data from the St Louis Fed and is from the early 1940's.
In any typical quarter since the 1940's, one could expect GDP to increase 3.1% and show an increase in nearly 88% of all quarters. Following periods when GDP has declined to levels equal to or less 1.5%, the forward average GDP percentage change is -0.7% and has increased in only 38% of the observed periods. I would consider high recessionary risks.
The final estimate in GDP appears to be indicating that the risks are not as severe as I initially thought. Looking at the 1.7% percentage change level, the average GDP percentage change and batting average improves. The average GDP percentage change following periods when GDP has declined to a 1.7% year-on-year rate is -0.5% and has shown increases in 42% in all observed periods. To me this suggests a lower risk of recession than first assumed. However, I would consider this to indicate a period when the risks of a recession in the future remain somewhat elevated.
I will be interested to see what the employment data and specifically the acceleration/deceleration in employment levels suggests as to the risks of an economic contraction.
In any typical quarter since the 1940's, one could expect GDP to increase 3.1% and show an increase in nearly 88% of all quarters. Following periods when GDP has declined to levels equal to or less 1.5%, the forward average GDP percentage change is -0.7% and has increased in only 38% of the observed periods. I would consider high recessionary risks.
The final estimate in GDP appears to be indicating that the risks are not as severe as I initially thought. Looking at the 1.7% percentage change level, the average GDP percentage change and batting average improves. The average GDP percentage change following periods when GDP has declined to a 1.7% year-on-year rate is -0.5% and has shown increases in 42% in all observed periods. To me this suggests a lower risk of recession than first assumed. However, I would consider this to indicate a period when the risks of a recession in the future remain somewhat elevated.
I will be interested to see what the employment data and specifically the acceleration/deceleration in employment levels suggests as to the risks of an economic contraction.
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