Bureau of Economic Analysis – An economist writes every day


US GDP fell for the second consecutive quarter according to statistics released this week by the Bureau of Economic Analysis. This means that, by a common definition, we are now in a recession, which has sparked a debate over whether “two consecutive quarters of negative GDP growth” is the best definition (as opposed to “when the NBER says that there is”, as I usually teach and Jeremy argued for here, or whatever).

Naturally this debate has political overtones, since the ruling party would be blamed for a recession, so we’ve seen the CEA in the White House claim that we’re not in a recession, many on the other side argue that we are , and much hypocrisy from people who should know better.

But in political terms, the fight over the binary call “are we in a recession” won’t be the main economic driver of the November election – it will be inflation and GDP, especially Q3 GDP. One of the oldest and best predictors of US elections is the fairness model, which uses inflation and the number of recent “high growth quarters”. Fair’s update following the recent Q2 GDP announcement reads:

the predicted vote share for Democrats is 46.70, down from 48.99 in October. The lower predicted vote share for the Democrats is due to two fewer quarters of strong growth and slightly higher inflation

By Election Day, we will have another 3 months of economic data clearly indicating whether inflation is under control and whether economic activity is picking up or continuing to decline. Monthly inflation and unemployment data releases will be closely watched, but the most talked about release is likely to be third quarter GDP. It will sum up 3 months instead of just one, it will be of great relevance to the debate about how bad the recession is or if we are even at one, and it will probably be released less than two weeks before Election Day . The NBER certainly won’t weigh in until then; they tend to take more than a year to date recessions, not rule on debates in real time.

So when the BEA releases its third quarter GDP estimate at the end of October, what will it say? Markets currently estimate at least a 75% chance of it being positive (they had estimated a 36% chance of positive GDP in Q2 just before the last announcement). That seems high to me, the yield curve is still inverted and I bet investment will continue to slow, but exact GDP numbers are hard to predict. It’s a much easier bet that whatever the number is, it will feature prominently in political debates just before the election. We may get the third-quarter GDP growth number that would make the debate the most chaotic: 0.0%.


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