The forgotten factor in this week's chaos
Published 11/08/2011 | 05:00
THE drama which saw President Barack Obama pitted against the Republican-dominated Congress overshadowed the far less sexy but very significant revision to US growth figures, which occurred almost simultaneously and confirmed for the first time that the US is in the worst depression since World War Two.
Those revisions by the Commerce Department saw the US government slash its best estimates of how the economy has been performing over the last few years.
The new GDP figures were shocking and revealed that the 2007-2009 recession had gouged the world's largest economy far more deeply than previously estimated. Furthermore, the revised figures showed the recovery lost momentum throughout 2010 before stalling this year.
This much bleaker picture cast a long shadow over the hopes for US growth and helped to contribute to the ugly mood music that brought the stock market to its knees last week and again this week.
This was a game changer, a clear sign that we will be grinding our way out of a recovery over a relatively long period.
We now know that gross domestic product shrank 5.1pc from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1pc drop. That's the worst contraction since World War Two.
The second-worst contraction in the post-World War Two era was a 3.7pc decline in 1957-58. The new figures show the strongest quarter of the recovery was in the first three months of last year and growth has decelerated every quarter since then.
The previously unknown depth of the economic slump explains why the jobless rate doubled, climbing from 5pc at the start of the downturn to a 26-year high 10.1pc in October 2009.
"The overall recession is indeed deeper," Steven Landefeld, director of the Commerce Department's Bureau of Economic Analysis, told reporters. "This is the Great Recession, the deepest one we've had in the post-World War Two era."
Growth in the first three months of this year was revised down to 0.4pc from 1.9pc, which means the economy is much smaller than previously thought. By the fourth quarter of 2009, the updated figures showed GDP was $205.5bn less than previously reported; a cut equivalent to the size of the entire Irish economy.
In 2008, the GDP contracted 0.3pc rather than being little changed as previously estimated.
It shrank another 3.5pc in 2009, rather than 2.6pc, and grew 3pc last year, 0.1 percentage point more.
On a quarterly basis, the last three months of 2008 and first three months of 2009 showed the biggest cuts to growth, coinciding with the aftermath of the collapse of Lehman Brothers.
The fourth quarter of 2008 now shows an 8.9pc plunge in GDP, marking the steepest single-quarter decline since 1958.
Interestingly, the deeper contractions in 2008 and 2009 were due to bigger declines in consumer spending and business investment than previously estimated. Companies fared better and workers worse over the past three years than previously estimated.
This helps to explain several riddles that have long puzzled economists. Why did so many consumers cut spending so rapidly? Why has consumer confidence remained so low and is unemployment really as high as reported?
It now seems that not only was the world's biggest economy failing to recover in any meaningful way from the 2008 crisis but individuals were bearing the brunt of this failure.
This week, some of those chickens came home to roost for the stock markets and the companies which have been immune to the worst of the recession until now.