On the 31st of July the government of the United States reported that in terms of its gross domestic product (GDP) the economy had contracted at “only” a 1% rate in the second quarter of the present year. This fact, combined with the reported profits of various corporations and the loss of “only” 247,000 jobs for the month of July, has been used to suggest that possibly during the second half of the present year the economy will probably experience the much awaited recovery that would finally put an end to the almost 2 year long recession. Various economists have expressed that such a tendency in the indicators evidences that the stimulus plans of the Obama administration are finally having the desired- even if retarded effect.
One thing that pops up when examining the report of the Bureau of Economic Analysis (BEA) is that the estimate of 1% was based on the change between the 1st and 2nd quarters in terms of a 0.25% decrease between both quarters, a result that then is extrapolated to the whole year. This contrasts with the usual way of reporting, where the present period is compared to the same one of the previous year. If we compare the 2nd quarter of 2009 with the same period for the previous year, what one sees is a 4% contraction in the GDP which might suggest that the light at the end of the tunnel is a bit farther than what the mere contraction of 1% suggests.
In the same report we also observe that all the “positive” signs that the economy is on its way towards recovery are actually decreases in the rates of negative change of the indicators, something that doesn’t necessarily imply that we are “moving from a recession to a recovery” as many analysts have declared (check “US Economic Contraction Slowed in Quarter”, 31st July, NY Times). One alternative way to see this phenomenon, and borrowing language from physics, is as when an object is in a free fall and reaches its terminal velocity. In other words, there is no acceleration and a constant velocity is obtained. In the same way that an object that reaches its terminal velocity keeps falling, the slowing down of the negative rates of change can be interpreted as if the economy were settling in its stagnation. The point of this is that one shouldn’t derive mechanistic conclusions based on percentages, averages and tendencies without seeing the system as a whole. For example, the situation of a country like China and its interdependency with countries that buy its products, like the United States, is very important when one recognizes that the overall levels of consumption of China’s buyers is falling (in the same report of the BEA we see that imports for the US keep falling). We have already seen how mechanistic thinking failed to anticipate the losses of employment for the US during the month of June, something that should have prevented the “experts” from celebrating too early.