Tuesday, September 20, 2011

You Say To-may-to, I Say To-mah-to

In "GDP Slide Signals Recession. Soon." on Sunday, I indicated my fact-based opinion is that the U.S. economy either has shifted or is shifting to contraction from expansion.

One key factor in the forming of this opinion is the anemic 1.55% change in real gross domestic product (GDP) recorded during the most recently reported four-quarter period (i.e., between the third quarter of last year and the second quarter of this year.).

Support for this notion can be found in Forecasting Recessions Using Stall Speeds, a Federal Reserve Board staff working paper authored by Jeremy J. Nalewaik that was published last April 14.

According to Nalewaik: "This paper presents evidence that the economic stall speed concept has some empirical content, and can be moderately useful in forecasting recessions. Specifically, output tends to transition to a slow-growth phase at the end of expansions before falling into a recession."

Of course, the Washington-based economist adds, "[M]odels using output growth alone produce a considerable number of false positive recession signals, [so] adding the slope of the yield curve, the percent change in housing starts, and the change in the unemployment rate to the model reduces false positives and improves recession forecasting."

Meanwhile, Nalewaik contends, "GDI [gross domestic income] provides a better measure of output growth than GDP, its better-known counterpart, and in our work here, while stall phases are evident in GDP, they are more plainly visible in GDI."