Why GDP Growth May Not Alert Us to a Recession
March 29, 2019
The initial reading of Q4 2018’s GDP growth, 2.6 percent, was welcome news for economists, who took it as a sign that America may not join the rest of the globe in its economic slowdown. Conversely, the recent downward revision, to 2.2 percent, has prognosticators worrying that momentum may be slowing, and that we could be cresting into a recessionary window. However, as a recent article from the Economic Cycle Research Institute (ECRI) points out, using GDP growth as a predictor of a recession may be a fool’s errand.
The article reminds readers that in November 2007, right before the Great Recession, GDP growth surged to 4.9 percent. In the months preceding the 2001 recession, GDP growth declined to 1.1 percent. With our current reading, sitting between the two previous pre-recession readings, it is hard to tell from this data point alone which way the wind is blowing. This is precisely because GDP is a coincident indicator, meaning that it provides a snapshot of current economic condition, and has limited value as a predictive indicator. The article notes that it is only “well after a recession has begun that revisions to GDP data show an economic contraction in progress.” Until that point, we should not take strong GDP growth as a sign that there is not a recession pending.