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Tuesday, December 05, 2006

Is GDP Growth Below Stalling Speed?

Paul Krugman gives one reason why it isn't "wildly speculative" to suggest, as he did in this column, that a recession is possible:

Where Is the Economy Now?, by Paul Krugman, Money Talks: ...As I pointed out on Friday, in economics it isn’t just hard to predict the future, it’s hard to predict the present; often, hard data don’t come in for many months. So ... given what we know now, what’s a prediction of current economic growth?

Well, here’s one way to get a quick and dirty answer. The Institute for Supply Management index, which is an early gauge of ... manufacturing, seems to indicate that manufacturing is contracting slightly, though not plunging.

Now, ... there’s a pretty good relationship between manufacturing and overall growth. Here are annual growth rates of G.D.P. versus manufacturing since 1995:


What this seems to suggest is that slightly declining manufacturing is consistent with an overall growth rate of around 1.5 percent.

Two thoughts: first, 1.5 percent growth is way short of what’s required to create enough new jobs... If the economy grows only 1.5 percent..., the unemployment rate would probably rise to 5.2 percent or so.

Second, optimism about the economy basically depends on the belief that business investment will ... make up for the effects of the housing bust. But businesses won’t invest a lot if the economy is growing ... sluggishly... What that means, in turn, is that growth at 1.5 percent is probably below “stalling speed”: if we stay there for a while, things will get even worse.

Now, it’s clearly possible that the latest data are misleading... But my point is that there’s nothing wildly speculative about suggesting a possible recession. The data we have right now already seem to indicate, albeit through a glass darkly, that the economy is looking pretty weak.

    Posted by on Tuesday, December 5, 2006 at 03:33 AM in Economics | Permalink  TrackBack (0)  Comments (92)


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