Recession Still Appears Unlikely

Most of the recent flow of statistical reports on the economy have been disappointing, but all of the indicators are not unfavorable; there has been some important data that points to a continuing of the recovery. The frequency of suggestions that we may be headed for recession, with fairly big probability coefficients attached, has picked up noticeably. But it isn’t simply an issue of sifting the favorable indicators from the whole batch in order to build a case against the recession hypothesis; it is also a matter of appreciating how wobbly the data is, based on the revisions that have recently been made to numbers of the past year or two.

In the interest of preserving the high standards for accuracy and integrity that have always been associated with statistical reports of the Bureau of Economic Analysis in the Department of Commerce, it was decided to eliminate publication of the “flash” estimates of quarterly GNP, which used to be published about 10 to 15 days prior to a quarter’s end. Actually, this pre-preliminary estimate had not been revised by a significantly wider margin than had the preliminary figure, published about 15 to 20 days after the end of a quarter. It did seem, however, that recent “flash” estimates were particularly misleading, and it was undoubtedly a correct decision to abandon their publication. On any deep analysis, it becomes apparent that the “flash” was based on quite scanty information about a quarter’s overall economic activity.

Every July, there is a more comprehensive re-estimation process, and the revisions published just a few weeks ago are quite revealing abut some economic trends.

Upward Revisions

When it was earlier estimated that GNP had grown by only 0.7% in the fourth quarter of 1985, I had thought that the economy had been brought practically to a standstill then. The increase in consumer expenditures were also earlier put at only 0.1% for that same period. I had been anticipating a slowing down in the growth rate to almost recessionary levels; so I interpreted the poor showing at the end of last year as a flirtation with recession that was eradicated by the upturn in the first quarter of this year. Incidentally, the first-quarter figures have been up and down by fairly wide margins; they are now reported up quite strongly. But the estimates for the final quarter of 1985 was raised from 0.7% to the almost respectable figure of 2.1%. So, what are we to make of the revised estimate for this year’s spring-quarter growth at 0.6%?

In the first place, commentators, including some very professional people who ought to know better, are talking about the prevailing estimate of 0.6% as though it were a precise number. It still has to go through a revision in September and again next July.

In this year’s July report, there were 13 revised estimates of real GNP growth, and 9 were moved upward, some very significantly. Since 1974, two-thirds of the preliminary revisions were in the range of -1.2% to 2.8% and nine-tenths in the range of -2.4% to 3.5%. On the whole, it looks as though revisions of real GNP tend to lean more toward the upside.

Disposable income was often revised upward, and the personal saving rate was moved up for 1985, thus indicating that consumers are in a somewhat better position for continuing to support the recovery than had been thought. Also, real exports were revised upward more and real imports less frequently over the past 13 quarters.

So much for data revision. What are some of the more favorable indicators to refute the recession hunch? The worst point of the trade deficit, measured in current dollars, occurred at the end of 1985. The first two quarters of this year show smaller deficits than at the peak. In real terms, exports appear to have reached their low point in the middle of last year. Investment in producers’ durable equipment, which was an outstanding source of expansion in 1984, regained in the second quarter some of the slippage that occurred in this year’s first quarter.

Overall Improvement for Jobs

The monthly unemployment and employment reports continue to show overall improvement or, at worst, steadiness. In addition, the environmental factors remain in place. The dollar is down and continues to fall on a steady basis; interest rates are still falling, and inflation is under control; oil remains relatively cheap; there is less uncertainty over the tax bill. The German recovery shows some faint signs of improving. Defense spending puts a floor under government outlays. Orders have not weakened, and although housing starts have slipped a bit, they remain at a high level. Expenditure for residential construction showed a strong increase in the second quarter of this year. Final sales (GNP less inventory investment) grew markedly in the second quarter, and if we exclude the special factor of purchases of farm products by the Commodity Credit Corp., the expansionary trend looks good over a longer time period.

The negatives on industrial production, troubles in the oil sector and farm problems are all serious but, to me, they do not appear to be large enough to justify recession talk. In an economy with some very strong sectors and some weak sectors, the overwhelming tendency for recession does not appear to be present, especially when corrective adjustments could be taking place, as in foreign trade.

The trade figures are of extreme importance in determining where the economy is going in the months ahead. The July figures for merchandise trade were extremely disappointing, but there are some reservations to keep in mind when interpreting them. They refer to merchandise only, while the slightly improved trends noted for export growth and the trade deficit refer to goods and services.

Tourism and foreign earnings of interest and profits should continue to respond to the weakness of the dollar and to other factors that would tend to help the net exports of services. Also, the improved tendencies in net exports of goods and services are quarterly estimates, which average out bad monthly reports. Finally, these figures are subject to revision, as are the others that I cited above.

Economic fundamentals strongly indicate that the net trade figures should be improving soon, but we may need a significantly lower dollar, even beyond the drop that has already taken place, in order to get a strong turnaround. The dollar has not fallen with respect to some of our important trade partners such as South Korea, Mexico and Canada. That accounts for some of our disappointment in the trade figures.