Government underestimates GDP drop
Gross Domestic Product shrank 6.2% in the fourth quarter of 2008, much worse than the 3.8% the Commerce Department had predicted just a month ago. How did the government get it so wrong? Steve Henn reports.
An employee looks at inventory at Staples in New York City. (Spencer Platt/Getty Images)
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Kai Ryssdal: We had a guy on the program a couple of months ago who said he thought the economy was going to get worse before it got worse. I'm pretty sure that's where we wound up today.
The Commerce Department shared its most recent estimate of Gross Domestic Product with us this morning. GDP fell of 6.2 percent in the fourth quarter of last year. That is almost twice as bad as the government's first guess. Now, bearing in mind that the U.S. economy is an enormously complicated thing, it would seem that especially now, getting the GDP number right would be especially helpful.
We asked Marketplace's Steve Henn what the heck happened.
Steve Henn: Turns out this huge downward revision in GDP isn't a big surprise for many economists.
Diane Swonk: The initial numbers were just not to be believed at all.
Diane Swonk at Mesirow Financial says when the Commerce Department releases its first guess for the gross domestic product, it really is guessing. Data on trade and businesses inventories are not yet in.
Chris Lowe: So they always have to guess.
Chris Lowe's at FTN financial.
Lowe: Normally it's pretty easy to do, but right now exports are falling off more rapidly than we've ever seen.
In this economy the Commerce Department's models didn't work, at all. They overestimated the amount businesses would spend on inventories by $25 billion -- inflating the GDP. But Lowe says the fact business spent less is actually good news.
Lowe: The biggest fear in a recession is that products start to pile up on the shelves to such an extent that stores don't need to order anything anymore.
That leads to more layoffs. But don't get too excited. The Commerce Department also overestimated consumer spending and business spending on big-ticket items, which fell an astounding 27 percent.
Lowe: That's never happened before. I's just spectacular how fast things are falling apart.
If that's enough to drive you to drink, you're not alone. Diane Swonk says booze is:
Swonk: One of the few strong points in the economy too.
Year over year sales of alcohol is one place the economy is still growing.
In Washington, I'm Steve Henn, for Marketplace.
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From bon air, VA, 02/28/2009
No, no ...the economy did NOT shrink 6.2 % during Q4. It contracted at a RATE of 6.2 % PER YEAR. Roughly, if output was say 100 at the end of September, it was 98.5 at the end of December. All our media makes this error, but we expect better from Marketplace. You are adding to the public lack of confidence making the bad problem seem some four times worse than it really is.
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