Recession in U.S. Was Even Worse Than Estimated, Revisions Show
The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to revised figures.
The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the Commerce Department said today in Washington. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.
“We do tend to get bigger revisions at turning points in the economy,” Steven Landefeld, director of the Commerce Department’s Bureau of Economic Analysis, said in a press conference this week. On the more positive side, “in the past, we’ve tended to undershoot the recovery” as well, he said.
The data better explain why the jobless rate doubled, reaching a 26-year high of 10.1 percent in October, and has been slow to subside. The government also boosted personal income levels for each of the past three years, propelling the savings rate higher and signaling households are further along the process of repairing finances.
The rebound from the recession has been more subdued in the last six months of 2009, as the economy grew at an average 3.3 annual pace from July 2009 through December, instead of the 3.9 percent previously projected. By comparison, growth averaged 7.2 percent in the two quarters following the 1981-82 recession, during which the economy contracted just 2.9 percent.
The worst quarter of the current economic slump is now the final three months of 2008, in the immediate aftermath of the collapse of Lehman Brothers Holdings Inc., rather than the first quarter of 2009. GDP shrank at a 6.8 percent pace from October to December 2008, exceeding the prior estimate of 5.4 percent, making it the deepest quarterly drop since 1980.
The new data showed the peak of the last expansion occurred in the fourth quarter of 2007 rather than the second quarter of 2008. The figures are more in sync with the recession chronology prescribed by the National Bureau of Economic Research, the accepted arbiter of U.S. business cycles. The Cambridge, Massachusetts-based private group determined the slump began in December 2007, and has yet to announce when it ended.
Consumer purchases, which account for 70 percent of the economy, were cut for each of the past three years, with the biggest reduction taking place last year. Less spending on services than previously estimated, including financial services and auto repair, was responsible for the change.
Data on services, which make up almost 90 percent of the economy, are less timely than figures on manufacturing and are therefore subject to larger revisions, the BEA’s Landefeld said in the press conference.
Efforts are under way that will make it possible for the government to measure consumer spending at almost all service industries by 2013, said Landefeld. Starting this year, coverage will improve to about 39 percent from 19 percent in prior years.
Personal income was revised up by $18.2 billion in 2007, by $152.3 billion in 2008, and by $155.9 billion last year, the report showed. Part of the reason for the improvement was that corporate dividends didn’t plunge as much as previously estimated.
Disposable income, or the money left over after taxes, grew 1.5 percent a year on average during from 2007 through 2009, compared with a prior projection of 1.2 percent.
Higher incomes and less spending meant bigger savings as a proportion of disposable income, the revisions showed. The savings rate reached 7.2 percent in the second quarter of 2009, the highest since 1992.
“The consumer has made more progress in adjusting toward a more rational spending philosophy than previously thought,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said in a note to clients. “Savings rates are probably pretty close to where they need to get to on a long?term basis. Going forward, what we need now is more employment and income to allow households to spend at a more robust clip while maintaining a higher savings rate.”
Residential construction fell at a 22 percent annual pace during the 2007-2009 period, one percentage point more than previously reported for what was already the worst housing slump since the Great Depression.
The government revised pre-tax corporate profits down for each of the three years. The biggest change was a $97.6 billion reduction, or 7.2 percent cut, in 2008. The drop was mainly among financial institutions, indicating the financial crisis was more severe than previously estimated.
Price measures including the Federal Reserve’s preferred inflation gauge -- which tracks consumer spending and excludes food and fuel -- were little changed during the 2007 to 2009 timeframe, the new figures showed.
The revisions are part of the government’s annual updates derived from broader, more complete, surveys.
The Commerce Department also reported today that the economy grew at a 2.4 percent annual rate from April through June following a 3.7 percent pace of expansion in the first quarter that was previously reported as a 2.7 percent gain.