The Bureau of Economic Analysis released an advance estimate of Q4 GDP. It's not good. But compare these two headlines:
Steep Slide in U.S. Economy, but Not as Dire as Forecast, from the New York Times. Phew, dodged a bullet. Sure, GDP shrank 3.8%, but think of how much worse it could have been!
GDP Drops 3.8% as Spending Falls, from the Wall Street Journal. Factual, includes nothing about expectations or forecasts. And the first sentence adds some much needed context: "The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth." (Emphasis mine.)
So the Times front-loads its reporting with an optimistic-sounding comparison to the forecasts of economists. But that headline ignores the source of the deviation from expectations -- inventory buildup. Due to accounting convention, the US classifies inventories as investment, though no firm wants to accumulate inventories, and the more there is in inventory, the less the economy has to produce in the future to meet demand. Inventories are bad for firms and an indicator that even if consumer demand picks up, it will not immediately translate into increased production (need to draw down inventories first). So the GDP figure might not have been bad as forecast, but not because things are turning around, but because they haven't hit bottom yet.
Helpfully, the Journal provides a more sophisticated analysis of the situation, and points out that buildup. Indeed, according to the Journal, GDP contraction was 5.1% excluding accumulation of inventories. That figure is probably closer to what most economists were expecting. Intrade markets had a contract on GDP advance figures at 5% or worse trading at ~60, indicating people expected a 60% chance of that outcome.
Unfortunately for the dystopians that bought that contract at 60, an accounting convention stood in the way of their payday. This whole episode demonstrates how important it is that a reporter have a solid understanding of his or her subject matter. Otherwise, you might get a happy headline obscuring dire economic news.
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Meanwhile, some conservative economists have repeatedly made nonsensical objections to the stimulus package. Eugene Fama might be the worst offender, and here's Brad DeLong, Berkeley economist, providing an initial smackdown.
Fama uses this accounting identity (PI = PS + CS + GS) to argue that government debt spending will crowd out private sector investment and nullify the impact of Obama's stimulus plans. You see, if government savings (GS) go down (deficit spending) and private savings (PS) and corporate savings (CS) remain unchanged, private investment (PI) must decrease. However, as DeLong points out, the private investment figure includes unwanted inventories. Therefore, the accounting identity could hold even while the stimulus does its job and sparks economic activity; as government savings (GS) decrease to spur consumer spending and infrastructure projects, inventories (PI) decrease, but their decline forces companies to restart or expand production to meet demand.
So jump back up to the Journal article up top -- unwanted inventories are expanding and, as accounting rules dictate, it was recorded as an increase in private investment. When the stimulus kicks in and firms sell through inventories, private investment will decline. This is exactly DeLong's point. Fama will win a Nobel Prize some day, and I will never earn a PhD in economics. But I think I can figure this out.
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