Naive Extrapolations: GDP Down 3.8 Percent

The Wall Street Journal reports

Third-quarter GDP fell 0.5%. The back-to-back GDP declines were the first since GDP fell 3.0% in the fourth quarter of 1990 and 2.0% in the first quarter of 1991. 

The New York Times reports

In the broadest official accounting of the toll of the credit crisis, the government reported that gross domestic product shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. While that was less than economists’ expectations of a 5.5 percent drop, the decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders.

So which is the more meaningful number? The actual decline in third quarter growth or the extrapolated trend predicted for a year? Judging from the past, we should be wary of such extrapolations. And to the extent that this recession represents a problem of confidence, then reporting that the GDP is down 3.8 percent is, in the phrase of the maximum leader, the height of irresponsibility.  I’m comforted that Alan Reynolds agrees

The preliminary GDP estimate for the fourth quarter of 2008 is $11,599.4 billion (in 2000 dollars). That was 0.965% smaller than the third quarter — a figure commonly multiplied by four to convert it into a more dramatic 3.8% annual rate. But these quarterly rates are highly erratic, even in recessions, so converting them into compound annual rates is misleading if not foolhardy.

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