GNP's slow growth may signal recession

November 28, 1990|By Frank D. Roylance | Frank D. Roylance,Evening Sun Staff

Economists watch for the start of a recession much the way Baltimoreans watch for the start of a snow storm.

They pass around hot rumors, debate contradictory reports and watch for the first signs things might be slipping out there on Main Street.

Today, for example, the nation's economists were busy analyzing the latest revision of the Commerce Department's report on the gross national product during the third quarter of 1990. It showed that the U.S. economy was still growing in July, August and September, at an annual rate of 1.7 percent, indicating weak economic growth.

But the third-quarter GNP is probably irrelevant now, almost two-thirds of the way through the fourth quarter, because many economists believe the recession began as the third quarter was ending, and that the fourth-quarter GNP report in January will finally show the decline.

Economists are watching for a decline in the nation's GNP -- a complex government estimate of the total value of goods and services purchased during a specified period of time.

A decline in the GNP for two consecutive quarters -- six months -- is the widely accepted, though unofficial, definition of a recession.

"Official" recessions begin when the non-profit National Bureau of Economic Research, which surveys the economic data monthly, says they do. So far, it hasn't.

The problem with the GNP is that it is a snapshot of a storm cloud of months ago. By the time you see it, you already could be mired in heavy economic weather.

The consensus among economists is that eight years of uninterrupted growth (except for a quarter in 1986) has ended, said Paul W. Boltz, financial economist and vice president at T. Rowe Price in Baltimore.

"This [third-quarter growth] was the last hurrah," he said. The fourth-quarter GNP will show a decline, and "it will be a slow Christmas season."

A poll of 51 economic forecasters released yesterday found that 75 percent believe the nation is already in a recession. Happily, two-thirds also feel it will be a relatively mild recession that will blow over by April.

If so, the recession may be over before it's officially declared, said Steven G. Cochrane, senior economist at WEFA Group, a Philadelphia economic forecasting firm.

That's because this quarter's GNP won't be reported until late January. The second-quarter report won't be out until the end of April.

If both quarters show a shrinking national economy, that meets the definition of a recession. But "it could be over before we know it," Cochrane said.

So, what good is the GNP as a measuring device?

"It falls into the 'This is the best we've got' category," Boltz said. "As investors, and taxpayers and citizens, to judge the state of the economy and do our planning, this is best we can do. It's never going to be perfect. But it is . . . getting better."

Who bothers with the GNP?

Government policy-makers watch the GNP because a shrinking economy means fewer sales, less income and less wealth to tax.

"That means that government services may have to be cut back . . . and government has to try to find other sources of revenue, either by raising taxes or borrowing," Cochrane said. "The classic strategy during a recessionary time is to try to jump-start the economy by spending more money. You'll be seeing a lot of congressmen in the next session arguing that we should spend money to help the unemployed and get them back on their feet. Others will say we can't afford it."

Corporate managers watch the GNP because signs of a slowdown are a warning to reduce inventories before customers disappear.

Periodic news reports on the GNP may provide clues to the future for ordinary people, Cochrane said.

A slowing economy means government will be looking for more tax revenue from workers' paychecks. If government seeks to borrow the money instead, it will mean less for the rest of us and higher interest rates on mortgage and car loans.

GNP figures showing a decline in consumption may signal a retail sales slowdown, which might threaten people working in factories and sales with fewer hours or layoffs.

Slowing investments may threaten builders, carpenters, brokers, bankers, tellers and others in the investment pipeline.

A glossary

* Gross national product -- or GNP, is an estimate, based on extensive data gathered by a variety of government agencies, of the total value of new goods and services produced by the economy during a given period of time.

It's a bit like measuring your personal wealth, not by your income and bank balances, but by adding up the value of everything you purchased during the past three months, or 12 months.

The GNP includes mountains of data in several main categories, said Paul W. Boltz, financial economist and vice president at T. Rowe Price in Baltimore:

* Consumption -- "Everything that households buy, from rent to toothpaste to tuition payments."

* Investment -- It includes fixed investments in plant and equipment by businessmen, and inventories. It also includes residential investment in new homes and buildings, but existing property doesn't count.

* Government spending -- local, state and federal. It includes things like defense, roads, sewers and schools, but not spending on income supports such as welfare.

* Net exports -- Everything we sell overseas, minus everything we buy overseas. This number has been in the red for many years, since we buy more than we sell abroad.

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