The Economic Contraction is Losing Steam


[Source:, May 20, 2009]

The sharpest contraction in economic output (real GDP) during the current recession apparently occurred in the final quarter of last year when a massive financial market shock threatened to throw the U.S. and global economies into 1930s-like depressions. The “Great Recession” is hardly over, but the rate of decline is slowing and the light at the end of the tunnel is coming into view.

GDP contracted at an annual rate of 6.3% in the fourth quarter of 2008, quite a serious matter. The “advance” estimate for the first quarter of this year was down a dismal 6.1%, but late-breaking March data on construction, international trade and business inventories point toward an upward revision to the contraction to about 5.5% — close to our original projection.

Available information on economic activity and financial market performance suggests that the rate of contraction in real GDP will ease off considerably in the second quarter. We’re currently estimating a 1.2 % rate of contraction for this quarter, as the fiscal stimulus program adds about 2 percentage points to growth and as business fixed investment (residential and nonresidential) contracts at a slower pace than in the first quarter.

We continue to believe that GDP growth will swing into the black in the second half of this year, aided and abetted by the fiscal stimulus program and by the financial market policy blitz engineered by the Federal Reserve, Congress and the Administration. However, we’re expecting below-trend GDP growth that will be accompanied by further deterioration of the labor market.

That pattern may or may not be strong enough to encourage the Business Cycle Dating Committee at the National Bureau of Economic Research to declare an end to the recession before the end of this year.