People like me, bond guys, who concentrate on the markets’ daily or even hourly changes, have a one-dimensional view of economic data. What’s new? What points to the future? What will cause the biggest move in interest rates? We tend to undervalue backward-looking data and, so, fail to acknowledge the rightful preeminence of Gross Domestic Product. GDP is the total output of all goods and services produced by labor and property within a country or region during a given period. The sum of all local GDPs adds up to global GDP, the ultimate measure of global economic output. GDP incorporates information on personal and business income, consumption of goods and services, international trade, inventory buildup, government spending, and inflation. It’s almost unimaginable today to conceive of a government attempting to manage fiscal and monetary policy without reliable GDP data.
And yet, GDP was only developed in the United States following the Great Depression, and the first contemporaneous data did not appear until 1947. All of the historical data on GDP before then was amassed long after the fact. Today, GDP calculations are performed by the Department of Commerce’s Bureau of Economic Analysis. The BEA announces an “Advance” report on the previous quarter’s GDP about 30 days after the quarter’s end. A “Preliminary” report is released a month later, and a “Final” report after another month. Further revisions are produced every July, and a “benchmark” revision to all previous data is made every five years. Most developed countries follow similar patterns, so we already have an initial indication of what happened to the global economy in the last three months of 2008.
US GDP fell at an annualized rate of 3.8% during the fourth quarter according to the “Advance” report. Most economists expect the “Preliminary” report to be revised considerably lower based on extremely weak data released in recent weeks. For all of 2008, GDP increased 1.3%, mainly because exports held up well during the first part of the year. This was partly due to the weak dollar making US goods more affordable overseas. More ominously, developing economies were still buying US equipment and tools to build capacity for export back to the US consumer just when our spending was starting to slide. US imports of goods dropped a staggering 18.8% last quarter, and have been dropping, though much more slowly, for more than a year. Imports are a subtraction from our GDP because they are not produced in the US. A decrease in imports increases GDP. Exports of US goods fell 27.7% in the fourth quarter, as unsold inventories piled up. In another statistical anomaly, inventories add to GDP. In the fourth quarter, $6.2 billion of increased inventories boosted GDP by 1.3%. These inventories will have to be worked off, reducing GDP in future quarters.
Other countries are in a similar fix. German GDP fell 2.1% from the third to the fourth quarter because of falling exports and growing inventories. French GDP fell 1.2% and Italy’s fell 1.8%, the most in at least 30 years, again on falling exports. In the United Kingdom, GDP dropped 1.5%, the biggest quarterly decline since 1980. If it sounds as though the Eurozone is doing better than the US, think again. The BEA’s percentage changes are annualized, while European data is not. To make European data comparable to the US, multiply it by four.
As bad as conditions are in America and Europe, Asia is worse. In Japan, which boasts the world’s second largest economy, industrial production is down 20% year over year, led by automobile production, which is down 25%. Nissan, Sony, Panasonic, Toyota, NEC, Hitachi, Pioneer, and Nikon have all announced layoffs and either losses or severely reduced profits. Corporate bankruptcies rose 15.8% in January. Fourth quarter GDP tumbled 12.7% (annualized). Japan’s ability to export simply vaporized, falling at an annualized rate of 45%.
Even mighty China is not exempt. Export shipments declined 17.5% year-over-year in January. Exports to China’s two biggest trading partners, the US and the Eurozone, dropped $1.9 billion or 9.8% and $2.4 billion or 17.5% respectively. Declines in exports to other Asian countries, while smaller in dollars, were much larger in percentage terms. Bloomberg reports that, as a result, 20 million Chinese migrants from impoverished rural areas have lost industrial jobs. The value of imports is down 43.1% in concert with China’s declining need for raw materials used in industry. China’s Asian trading partners are disproportionally hurt here as well. Fourth quarter GDP rose 6.8% (annualized), which would be phenomenal in the developed world, but is dangerously subpar in China. It was the worst performance since 2001 and the first time that quarterly growth was less than 9% since 2003.
The International Monetary Fund projects that world output will grow just 0.5% in 2009. The Fund projects a rebound in 2010 (see chart) but hedges its bets by noting that the risks are all to the downside. Output in the advanced economies of North America, Western Europe and Japan are projected to decline by 2%. This would be the first full-year contraction since World War II. Growth in emerging economies will be sliced in half from 6.25% in 2008 to just 3.25%. Under this gloomy scenario, the United Nation’s International Labor Organization projects that the ranks of the unemployed will swell by 30 to 50 million people this year. In 2008, the worst year since 1998, world unemployment rose by 10.7 million to 190 million.
What, if any, conclusions should we draw from this survey?
First, for better or worse, the data confirms the absolute centrality of the United States in the world economy. Our function as Americans is to buy what the rest of the world makes. If we have to do it on borrowed money, so be it. As Saturday’s Wall Street Journal editorializes, the problem with frozen credit is not that banks won’t lend. Banks are lending as much as they prudently can, but for many years they’ve had nowhere near enough deposits and other funding to meet the demand. That’s why large banks developed the “originate to distribute” model in which all sorts of consumer loans—car loans, home equity lines, credit card receivables, and “jumbo” mortgages—were securitized. Since the fall of 2007, investors have simply stopped buying any but government guaranteed asset-backed securities. Reviving the once-huge market for privately securitized consumer debt is the key to unlocking credit in the United States.
Second, the world has to avoid the “beggar thy neighbor” trap that exacerbated the Great Depression and was an indirect cause of the Second World War. Free international trade must be maintained, despite the popular allure of “Buy American” slogans. Both President Obama and British Prime Minister Gordon Brown have warned that, in Brown’s words, “a retreat into protectionism” is the world’s single biggest economic threat. Here China, with its record $39 billion trade surplus, holds the key. Following discussions on Friday, the finance ministers and central bankers of the G-7 (the world’s major industrialized nations) issued a statement that read in part, “We also welcome and appreciate the prompt macroeconomic response from others throughout the world. In particular, we welcome China’s fiscal measures and continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi* in effective terms and help promote more balanced growth in China and in the world economy.” In the meantime, however, Chinese governmental officials were urging the depreciation of the Yuan to promote exports. Treasury Secretary Geithner backed off earlier criticism of Chinese currency manipulation and stated, “The United States is very much committed to working closely and cooperatively with China as we move together to address this global economic crisis.” This is a positive sign.
Third, the cliché that things are going to get worse before they get better applies not just to the United States but to the entire world. In poorer nations with less stable governments and tenuous social safety nets, the threat of violence is real. Food riots occurred last year when prices of basic commodities rose. So far, the economic turmoil has not spilled over into the streets or thrown up a charismatic, Hitler-like demagogue. But the longer the crisis lasts, the more likely such a possibility becomes. That’s how high the stakes are.
*The Renminbi is the currency of the People’s Republic of China. Its main denomination is the Yuan.