By Danny Schechter

The official headline for U.S. Q1 GDP growth says a
positive 0.6% growth but the details are ugly and
confirm that we are in a recession.

First of all, if you exclude the increase of inventory
of unsold goods (that moved positive after a negative
figure in Q4) the Final Sales of Domestic Product were
a negative 0.2%. In other terms, inventories of unsold
goods added an artificial 0.8% to Q1 growth boosting
it from a negative 0.2% to a positive 0.6%. So actual
aggregate demand (Final Sales of Domestic Product) –
the actual measure of growth of true demand - fell in
Q1. And this build-up of inventories in Q1 means that
the fall in GDP in Q2 will be larger than otherwise as
firms will have to reduce that large inventory of
unsold goods via a further reduction in production and
employment.

Second, residential investment is in total free fall,
collapsing at an accelerating annual rate of 26.7%.
But GDP figures underestimate the true fall in
aggregate demand as they do not separate residential
investment into true final sales of new homes and into
the unsold inventory of new homes that are produced
and not sold. Thus, all production of new homes is
assumed to be sold in the national income accounts
data. But we know that home sales are falling more
than production of new homes, that cancellation rates
(running at a rate of 20-30%) are not included in the
new home sales figures and that the inventory of
unsold new homes is actually rising. Thus, if the BEA
had correctly measured final sales of domestic
product, by having a separate line for the change in
the inventories of new unsold homes (the equivalent of
the change in business inventories), the figure for
final sales of domestic product would have been even
more negative than the already negative 0.2%, probably
a negative 1.0%. So the national accounts make a
methodological mistake in measuring final sales of
domestic product by assuming that the change in
inventories of unsold housing is always zero,
something that is obviously wrong especially during a
severe housing recession.

Third, now all components of fixed investment
(residential investment, non-residential investment in
structures and capex spending by the corporate sector
(i.e. non residential investment in software and
equipment) are now in negative growth territory. This
is a major difference relative to 2007 when structures
investment and capex spending were significantly
positive. The investment recession is now clearly
spreading from housing to non residential commercial
real estate and to real capital spending by the
corporate sector.

Fourth, since the quarterly GDP figure compare the
average GDP in the first three months of 2008 to the
average GDP in the last month of 2007 even a flat or
slightly falling GDP in some months of Q1 is
consistent with the average being positive relative to
the previous quarter (that is the average of three
growing months). And data on monthly GDP (say from
Macro Advisers) show that GDP started to fall in
February of 2008. This is the typical inertia in
growth figures that comes from looking at quarterly,
rather than monthly, figure. Thus, the Q2 GDP
contraction will be larger than otherwise.

Fifth, both durables goods consumption and non durable
goods consumption grew at a negative rate in Q1. What
boosted an anemic 1% growth in Q1 consumption was a
still positive growth in services consumption. Durable
consumption spending is clearly collapsing (-6.1%) But
the fact that spending on non durable goods is falling
– something that has not happened in decades – is an
ominous sign.

Sixth, the only good news on growth came from net
exports. But with sharply rising oil prices in the
last few months you are going to see a sharp rise in
imports of oil and energy goods in Q2 that will
further depress Q2 growth.

Finally, the NBER does not use the mechanical rule of
two consecutive quarters of negative GDP growth in
determining whether we had a recession or not. The
NBER looks at a variety of economic indicators and
puts more emphasis – among other variables – on
employment and labor market conditions. We do know
that employment in the private sector has now fallen
for four months in a row and that overall non-farm
employment (including the government employment) has
fallen for three months in a row. So I do expect,
leaving aside possible future downward revisions in
the Q1 figures, that the NBER will eventually date the
beginning of the 2008 recession to the first quarter
of 2008.