Deserted Islands, GDP and Joe Friday

So I turned myself to face me
But I've never caught a glimpse
Of how the others must see the faker
I'm much too fast to take that test
Ch-ch-ch-ch-changes

- David Bowie

There's an old economist joke about three men stranded on an island with nothing but canned beans to eat. Their approach to opening the cans differs due to their professions. The physicist wants to build a giant lever that will launch a can onto a rock, thereby splitting it open. The chemist wants to build a fire and heat the can until it explodes. Turning to the third member of their crew, an economist, they ask his solution. "Well," the extremely professional-looking man says, "first let's assume we have a can opener."

And so it was last week with the Bureau of Economic Analysis' comprehensive revision of accounts. In other circles, this would be called the "do-over" report. To be sure, every compiler of economic data has a similar report (hence the popularity of economist jokes), but this is the big daddy of them all. After all, if we don't know the size or speed of movement of our economy, what use are any other statistics?

Turning to the numbers, we now are told economic growth actually turned negative in the first quarter of 2008, instead of remaining positive until the third quarter. Additionally, the extent of the downturn last year was supposedly much greater than we were originally told, to the tune of 1.1 percent. In other words, the economy was some $150 billion smaller than originally reported.

Under the do-over scenario, we have now had four consecutive quarters of negative growth - the most since data began being compiled back in 1947. Strange that we wouldn't know things were that bad during the bad times, but now looking back, we can be relieved we survived.

The old textbook definition of a "recession" is two consecutive quarters of negative growth. Under either data set, this recession began in July 2008 and is ongoing. But that's the old way of defining a recession.

Earlier this decade, the National Bureau of Economic Research (NBER), which resides under the Executive Branch, decided that the definition needed to be tweaked. It seemed the old one was far too rigid, so now the official definition is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production, and wholesale-retail sales."

In other words, recessions occur when the NBER tells us they do. How comforting.

The change in this stance happened after 9/11 when it became clear the BEA's GDP figures would not show two consecutive quarters of negative growth. Given the overall feeling that we were in a recession, the NBER had to scramble to redefine the word to fit the circumstances. Much like teenagers referring to 23 things a day as "awesome" or "gigantic," this word has now lost its meaning.

Any time period can now be labeled a recession, as long as the economists at the NBER determine it should be so. The truth is even worse in the remainder of the financial industry where words like recession, recovery, expansion and even growth mean different things to different people.

The romanticization of the stock market and economy as entertainment has led us down this path. Until we get back to discussing specific facts (and indeed, measuring them correctly in the first place), confusion will reign. But, there are many in this dark world who make their living in that confusion.

It's up to us to return to Joe Friday's old standby of "Just the facts, ma'am."

Key Developments

New home sales struggled to get off the mat, rising 11 percent in June to an annual pace of 384,000 - still a measly figure. There has been a recent stream of evidence that a bottom is occurring in the residential construction market, which is certainly good news; however the bottom is so low and prospects so meager, it's difficult to feel good about this trough.

Durable goods orders, a measure of long-term purchases for both consumers and businesses, fell by 2.5 percent. Though disappointing, this measure seems to be treading water around the $160 billion area versus the $210 - $220 billion pace we enjoyed from 2005 through 2007.

The initial estimate for second quarter GDP came in at -1.0 percent, better than the consensus estimate of -1.5 percent. Major revisions to prior month's data imply the economy fell faster and may now have reached bottom. Outlook for the remainder of the year includes an improvement in these figures, though a return to consistent +3 percent growth remains a far-off oasis.