That third-quarter rise in GNP: it's no clue to how fast a recovery may be
North Egremont, Mass. — The rise in real gross national product in the third quarter -- less than a quarter of a percent -- is no indication of the probable future rate of recovery of the US economy.
If you do not recognize the quarter-of-a-percent rise as what happened in the third quarter, it is probably because you have been reading about the widely publicized 1 percent annual ratem rise. The annual rate rise is slightly more than four times the actual percentage increase in GNP in the third quarter over the second quarter.
If you question our statement that the increase is no indication of the future pace of an economic recovery, it is probably because you have been reading widely publicized statements to the contrary which contend that the small rise ism an indication of the probable sluggishness of a recovery. A subsequent economic recovery may well be sluggish, but such a development does not follow from the small third-quarter 1980 increase.
The third-quarter GNP figure is a preliminary estimate. There is at least a fair probability that the final figure will show an even smaller increase, if any at all. The second- quarter figure was revised downward roughly by $2 billion at an annual rate from the first preliminary estimate.
Would that mean the future rate of recovery would be even less than suggested by the present figure?
Not at all.
Our seeming statistical nit-picking over the third-quarter GNP figure highlights the fact that assessing the course of the economy requires something more than profound theorizing over the impact of the Federal Reserve, the money supply, interest rates, consumer spending, etc. It is essential that one understand the meaning of a particular statistic.
Two successive quarterly GNP figures, just because each consists of three months of economic activity, simply do not provide us with either a direction change in the course of the economy during those six months or the current rate of change of the latest monthly data during those six months.
The economy could be up for two months and down for four months or down for four months and up for two months, or-some other combination of ups and downs, and you could not tell a thing from the quarterly GNP data.
Well, you say, that still sounds like statistical gobbledgook.
All right, let's just look at the rates of recovery in the first quarter of GNP improvement after the major so-called recessions during the post-World War II years.
Did the economic recoveries that followed those first-quarter GNP improvements proceed at the first-quarter improvements rate?
There have been six such recoveries. How many of those recoveries do you think continued at the rate of the first-quarter GNP improvement? All six? None? Some of them?
The answer is, some of them. Only two of the six recoveries have proceeded at the firstquarter GNP pace. In 1949 and again in 1975, the economy continued upward for some time at close to its early rate.
In four of the six recoveries, a clear majority, the first-quarter GNP rate did notm prevail. On three of the four occasions, the rate speeded up; on one of four occasions, the rate slowed.
On the two occasions when the first-quarter improvement rate continued, the early rate was relatively fast.
The idea that the economy perpetuates its most recent rate is pretty much an old wives" tale. Much is made of the upward of downward momentum in the most recent quarterly rate, as if that tells us something about the future.
We do not have to look very far back to see the last time such a notion was misleading. The second-quarter drop in 1980 GNP was so great that it led to a host of observations that the economy was falling apart, the recession was to be worse than 1974-75, and other dire forebodings.
The very next quarter, preliminary GNP data show an increase.
The downward momentum in second-quarter 1980 did nothing to depress the third quarter.
Similarly, the lack of any great upward momentum in the third-quarter 1980 GNP increase provides no clue to the pace of the economic recovery that lies ahead.