GDP – reality catches up with expectations

Today’s revised GDP numbers show a much sharper decline in the 4th quarter of 2008 that previously reported — a 6.2% decline rather than 3.8%. However, the revised numbers are in line with the earlier expectations of a 5.5% to 6% decline (see earlier posting). The biggest change from the earlier data was in inventories, which shrank rather than increasing as reported earlier. That, as the Wall Street Journal points out:

was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news.

The bottom line is that the situation is still very dynamic — any backward looking indicators are likely to be incorrect in the first estimates. So rather than look back, we need to keep our focus ahead. And that means crafting a transformative economic policy – not one that simply tries to reflate the bubble. The stimulus package and President Obama’s proposed budget seem to be heading us in that direction. For that reason, expect a fair amount of resistance. As the Wall Street Journal noted:

Democrats welcomed Obama’s budget as a long-awaited reordering of the government’s priorities. Republicans expressed dismay for the same reason./blockquote>Changing the status quo is never easy.

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