Nominal GDP

Wednesday’s GDP report was awful. It now looks like the economy has entered a recession, or a best, a situation very close to one.
Here’s a look at nominal, meaning not adjusted for inflation, GDP growth. Some folks think this is where the Fed Funds rate ought to be. For the last quarter, nominal GDP growth came in at 3.2% (annualized) and the Fed is now down to 3%.

The problem with GDP is that one lousy quarter usually leads to another lousy quarter. The data series is very trend sensitive. For real GDP, the magic point seems to be 2.8%.
In 1990-91 there were seven straight quarters below 2.8%.
Then 26 of the next 34 were above 2.8%.
This was followed by 11 straight quarters below 2.8% (in 2000 to 2003).
Then nine out of 12 were above, and only three of the last nine were below.
Over the last 60 years, 57% of the quarters have had growth above 2.8%. But one quarter with above 2.8% growth has a 66% chance of being followed by another above 2.8%. A quarter with less than 2.8% growth has a 44% chance of being followed by another one below 2.8%.

Posted by Eddy Elfenbein on February 1st, 2008 at 12:33 pm

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