New GDP Data, New Economic Forecast for February 2009

New GDP data came out today, and they were not as bad as we expected.  There was bad news, notably that inventories rose last quarter.  There will certainly be an inventory reversal this quarter (probably) or next quarter (less likely), which will pull GDP down.

Consumer spending fell, but not by as much as in my forecast.  And I thought I was being the optimist.  The big deviation from my expectations: business spending on equipment and software dropped a lot more than I thought it would in a single quarter.  There was supposed to be a temporary stimulus to equipment spending from a temporary tax depreciation benefit, but I certainly cannot see it in the data.  That should make us all a little more skeptical about short-term stimulus proposals, even tax-cutting proposals.

I took the new GDP numbers and revised my forecast for 2009.  Here it is:

Previously I had 2008q4 as worse than 2009q1.  I've now reversed that pattern.  I pulled some numbers down for later quarters, but I keep getting that small upturn in 2009q2.  Gee, I go into the forecast process expecting to see a small negative second quarter, but after working through each of the sectors, I come up with a small positive.  Whatever.  Take the direction in Q2 with a grain of salt, think of it as a transitional quarter that could be a little up or a little down.  I'm much more confident that we'll be seeing growth in the second half of the year.

Keep in mind how economists view recession: it's when the change in real GDP is negative.  When GDP turns up, we're out of recession even if we have not yet recovered lost ground.  That's our definition; keep it in mind.  We don't recover all of our lost ground, in my forecast, until 2010q2.  Here's the path of actual inflation-adjusted GDP:

I'll add an update on financial markets next week.