Jimbo’s Official Recession-Watch Lottery
Friday’s eye-popping employment numbers (55,000 lost jobs, the worst one-month toll since the 1991 recession), combined with the previous week’s negative GDP numbers (down 0.1% in May, the fourth decline in six months), have raised once again the spectre that Canada’s total economy is teetering on the edge of “official” recession.
The suspense is growing as we head toward the August 29 release of second-quarter GDP numbers, which will determine whether Canada experiences a second consecutive quarter of negative growth. Don’t go to Las Vegas to bet on the outcome — instead, join Jimbo’s Official Recession-Watch Lottery! Place your bets below…
The standard definition of a recession is when a nation’s real GDP contracts for two consecutive quarters. (The U.S. uses a more flexible method, with the NBER’s official recession-watch committee making the call when a broader portfolio of indicators points to an economy-wide reversal. It may be a slightly more robust, but less timely, methodology – sometimes the NBER doesn’t “declare” a recession until it is already over!) Since Canada’s real total GDP shrank slightly in the first quarter of this year (by 0.3% on an annualized basis), another negative quarter will tip the scales into “official” recession. Needless to say, that would be politically disastrous for Jim Flaherty’s team of “competent” economic managers, especially given the increasing prospects of an election this fall.
What are the chances that this will occur? The second quarter, of course, is already history, so the outcome has already been decided. We just don’t know which way yet, since it takes about two months for Statistics Canada to process and announce the data (the second-quarter numbers will be released the morning of Friday, August 29).
Monthly real GDP numbers provide some interim indication of the direction of the quarterly tally, but even they have to be interpreted carefully. They measure real GDP by industry at factor cost; they do not include indirect taxes and several other smaller adjustments that are included in the computation of total GDP (which is only reported quarterly). (The factor cost series accounts for about 93% of total GDP; in recent quarters, probably because of declining private sector activity, total GDP has been growing slightly faster than GDP at factor cost.)
Also, the relationship between quarterly averages and month-to-month data can be somewhat trickier than you’d think. Whether the quarterly average rises or falls depends on the timing of the previous quarter’s monthly GDP trends, as much as on what happened during the current quarter. I’ve compared the monthly and quarterly data over the past year (see table below), and by my reckoning monthly factor-cost GDP would have to fall by 0.5% in June, in order to pull factor-cost GDP for the whole second quarter slightly into the red. That would likely (although not necessarily) pull total GDP into the red for the quarter as well – depending, of course, on what happens to that other 7% that is included in total real GDP but not in the monthly tally. (By the way, all data referenced in this commentary refers to real GDP, measured in chain-linked $2002 terms.)
Another complicating factor is the possibility that retroactive revisions to the data could eliminate the perceived small decline in first-quarter GDP (in which case even a second-quarter decline won’t officially constitute a recession). On the other hand, revisions can go in either direction: they could also make the first-quarter numbers worse.
It’s certainly not impossible that real GDP could have fallen 0.5% in June, but I tend to think it’s not likely, either. The table below reports a couple of other advance “clues” to the GDP direction: monthly employment data, and Statistics Canada’s leading indicator. Both of them point to some weakness in June, although not to a disaster. Total employment fell slightly in June (by 5,000 jobs). Full-time employment fell much more: by 40,000 jobs, or 0.3%. On the other hand, the much larger decline in employment in July could reflect a delayed reaction to a decline in output in June.
Meanwhile, the leading indicator was stable in June – following small increases in April and May (in May the leading indicator rose slightly, even though real GDP fell slightly). Both indicators suggest, therefore, the possibility of a small decline in June’s GDP. But the correlation between the leading indicator, employment numbers, and monthly real GDP is not at all perfect.
I tend to think it’s more likely that second-quarter GDP will be flat or experience a small quarterly increase over the first-quarter numbers, on the basis of a slight decline in monthly GDP in June. For that reason, along with the fact that the decline in GDP is not large (yet) in any event, perhaps we critics of the Harper government should downplay in coming weeks the risk that Canada may have already entered an official recession. That sets the bar far too low for Flaherty & Co. on August 29: all he then needs is flat scond-quarter GDP to claim “victory” in avoiding recession – whereas in reality flat GDP is itself a significant economic failure. (So long as productivity and the labour force are growing normally, anything less than 3% annual GDP growth is a recipe for growing unemployment, insecurity, and poverty.)
So even if Canada escapes an “official” recession on August 29 (for now, anyway), remember these key, damning facts:
- Real GDP (according to the monthly series) is still lower than it was last October (9 months ago).
- Employment is falling significantly, and unemployment is growing.
- National productivity hasn’t grown at all in the over two years since Harper came to power – the worst productivity performance for any administration in Canada’s postwar history.
- Canada’s international trade performance is crumbling dramatically.
That’s a miserable economic record indeed for the Conservatives to take to the polls. So whether second-quarter GDP grows a tiny bit, or shrinks a tiny bit, doesn’t really affect the dominant facts of the matter: this government has overseen what already ranks as the worst economic slowdown since 1991-2, doing nothing other than boasting about their tax cuts (which have made no difference at all) and the energy boom.
It’s rare that the release of official economic data is accompanied by all the suspense of a Grey Cup final or the Stanley Cup finals. So borrowing from the tradition of sports pools, I am proud to unveil Jimbo’s Official Recession-Watch Lottery. Entry cost is $10. Economists, non-economists, and even other unsavoury characters (like reporters) are invited to make a public prediction (place your bet in the “Comments” section below) of second-quarter real GDP growth (on an annualized basis, in chained $2002 terms) – and hence of whether or not Canada will experience an official recession. Place your bet, send me your $10 (or else promise to buy me a glass of good wine the next time you see me – I’m not picky!). Guesses are non-exclusive (that is, you can choose a guess even if someone else has already picked it). The spoils will be divided evenly among all correct entrants – with the strong expectation that they will collectively donate their winnings to a deserving charity like the Canadian Centre for Policy Alternatives.
However, the winner (or winners) must first answer the following skill-testing question before collecting their prize:
If, in the event that second-quarter GDP shrinks and Canada is officially defined as being in recession, what will be the main theme of Jim Flaherty’s response?
a) The recession is only a technicality.
b) Canada’s economic fundamentals are in great shape.
c) Thanks to beneficial shifts in the terms of trade, Canada’s real national income is growing, so it doesn’t matter how much we actually produce.*
d) All of the above.
Here’s my own guess: Much as I am tempted by the sheer poetic justice of successfully predicting a Flaherty-led recession, I am obligated by my creed as an economist to provide my best honest forecast. I predict (on the basis of a slight GDP decline in June) a tiny 0.2% increase (annualized) in second-quarter real GDP, and hence no official recessionÂ
Not yet, anyway … but there’s still time.
* P.S.: If you swallow the line that Canada’s improved terms of trade and hence improved “real national income”, a figment of statistical imagination, makes any direct difference whatsoever to the standard of living of actual average Canadians, I want you to help me perform the following economic experiment. I will personally send you a stack of Monopoly money, and we’ll see if you can pay your rent with it.
| Â |
Real GDP at Factor Price ($b 02) |
Real Total GDP ($b02) |
Leading Index |
Employmt (000) |
F-T Employmt (000) |
|
|
Mnthly |
Qrtrly |
|||||
| July |
1228.1 |
1229.5 |
1325.9 |
227.9 |
16857 |
13831 |
| Aug |
1230.4 |
228.4 |
16875 |
13824 |
||
| Sept |
1230.0 |
229.2 |
16930 |
13861 |
||
| Oct |
1234.0 |
1231.5 |
1328.6 |
229.3 |
16993 |
13899 |
| Nov |
1234.4 |
229.3 |
17015 |
13910 |
||
| Dec |
1225.9 |
229.1 |
17013 |
13915 |
||
| Jan |
1233.2 |
1229.9 |
1327.5 |
228.6 |
17059 |
13979 |
| Feb |
1229.4 |
228 |
17102 |
14028 |
||
| March |
1227.1 |
227.8 |
17117 |
14009 |
||
| April |
1232.5 |
? |
? |
228 |
17136 |
14029 |
| May |
1231.1 |
228.5 |
17144 |
13997 |
||
| June |
? |
228.6 |
17139 |
13958 |
||
| July |
 |
 |
 |
 |
17084 |
13951 |
| Â |
Month-to-Month Change |
||
|
GDP |
Leading Index |
F-T Employmt |
|
| July |
 |
 |
 |
| Aug |
0.2% |
0.2% |
0.0% |
| Sept |
0.0% |
0.4% |
0.3% |
| Oct |
0.3% |
0.0% |
0.3% |
| Nov |
0.0% |
0.0% |
0.1% |
| Dec |
-0.7% |
-0.1% |
0.0% |
| Jan |
0.6% |
-0.2% |
0.5% |
| Feb |
-0.3% |
-0.3% |
0.4% |
| March |
-0.2% |
-0.1% |
-0.1% |
| April |
0.4% |
0.1% |
0.1% |
| May |
-0.1% |
0.2% |
-0.2% |
| June |
? |
0.0% |
-0.3% |
| July |
 |
 |
-0.1% |
To be a pessimist, I will go with -0.2%. Mainly to do with my employment modeling and the drop in June.
I am taking a philosophy of science course and a course called “understanding the brain”. When you combine those two and then put on one’s economist thinking cap, a big chuckle comes forth from the mouth.
THe understanding the brain course is quite an exciting course, I never realized how much of a visual animal we are. Amazing the amount of neurons and projections allocated to the many visual components of the brain.
On that basis and you combine the philosophy of science course, explains why we need these neat little charts and the anally defined concepts that everything is counted and representative.
So I do agree very much and go back to your point, what is a recession and how should we be measuring it. Given all the declines in many measures, the dramatic disappearance of productive assets and associated high paying jobs, I would think that the ear to the ground recession is a lot louder than any number could yell. (hearing is a good sense, but amazingly effiicent when it comes to neuron allocation)
Unfortunately politics demands these numbers games, I just hope you are right Jim hat the on the ground stuff translates to more votes than the number games and there ability to translate to votes.
What is a recession. Quite an astounding question really.
paul. T.
Two more data tidbits to throw into the brew, along with the rest of the tea leaves we are examining here:
1. Housing starts: CMHC reported yesterday (Aug 11) that July residential housing starts fell 14% from June, to a s.a. annual rate of 186,500. That was on top of a 4% decline from May to June. This suggests (like the July employment numbers) that output conditions got significantly worse in July. This timing may be convenient for Mr. Flaherty avoiding a second-quarter GDP decline (and hence a recession) — but could augur a more serious downturn in GDP coming in the thrid quarter.
2. Canada’s auto assembly output actually rose slightly in June, up 10% from May (even though it’s down on a year-over-year basis). Recall that a steep downturn in auto output was a key factor in the decline in GDP in the first quatrter.
Skill testing question revsisted:
My good friend Ellen Russell is on vacation and hence refuses to make a GDP prediction. She did suggest an alternate answer to the skill-testing question, however:
e) The economic downturn is the fault of Canada’s old government, not Canada’s “new” government, and if only the Tories had a majority they could do the decisive things necessary to pull us out of the soup.
I think Ellen’s answer is true “Flaherty-ish”
Not being a risky gambling person, I shan’t dare to make a prediction. However, it would not behoove the Tories to have a bad statement come on Aug 29th, especially if they want to head to the polls in the fall. On the other hand though, going to the polls in the fall would surely lessen the heat (and attention) on them for actually being the ‘no good’ longest serving minority government in history and of course leave the mess for another administration to deal with. Their problem is – it could be them again! Such drama! Such confusion and indecision PM Harper must be dealing with!
I can tell you how much my heart bleeds for him – NONE.
Regular working people need to wake up and pay attention – not ONLY just when things affect them.
What we are seeing is what you Jim, and others predicted years ago. The Corporations will run the country and rule the world if they can – if we let them.
Actions are necessary — but voting, and how we vote is even more important.
yes I do recall the analysis stating that the American Axle strike had impacted the GDP. Call me an X-Files kind of guy, but in your opinion did American Axle have that kind of impact on the Canadian Auto sector Jim?
It was heavily underlined in the data release at the time.
Nice analysis and good advice, Jim.
I have another answer to the skill testing question: (f) it’s Obama’s fault, for telling U.S. teenagers not to max out on their credit cards.
Whatever their response, I suspect that they just might welcome the onset of a recession. It’ll shift public concerns away from the environment and onto economic issues, which they presumably poll better on. It would also give them a ready excuse to engage in more slashing of public programs, whcih we are already seeing the start of.
I expect that they are amassing a bit of a kitty from these cuts, go slow spending and from asset and airwave sales and will put that into kitty that could be used for some populist tax cuts or “rebates”. These would have little positive economic impact but would give the appearance of doing something.
Whatever way the data fall, we need to further succinctly articulate our alternatives for a short-term economic program to respond to the slowdown.
By the way with your lottery, do we get refunds if subsequent revisions reverse the outcome? Will there be drug-testing of participants in this competition and should we need to send in a urine sample along with our monopoly money?
Interesting that the CD Howe Institute is promoting GDP based equities, just as this indicator is going down. Nice timing.
http://www.cdhowe.org/pdf/commentary_271.pdf
Arthur Donner sent me his prediction by e-mail: GDP up 1.2% (annualized) in the second quarter.
Re Skill Testing Question: What about ‘blame Ontario’? Or has that already bombed?
Hello Jim,
After reading some of the commentary on Statistics Canada, I have concluded that there will be no decline in GDP in the second quarter. However, later the figure will be adjusted downward to show that there really was a recession.
Of course, in Windsor, we have been in a recession for more than a few quarters. Not to worry! The expansion of the Casino has just been completed, the Red Bull air race is on the way for next year and a new commercial-residential-marina development has been unveiled for the waterfront. Some spoilsport wrote to the local paper asking why a new residential development is required when people are leaving the area. Some folks just don’t get it.
Harry
Canada’s international trade performance is crumbling dramatically.
Huh?
BTW, the improvement in the terms of trade means that we can trade fewer imports for more imports. This has accounted for more than half of the increase in real buying power since 2000.
My call: negative 0.1 with more bad news to come. The regional dimensions of the downturn are going to change federal politics. The conservative West \ Quebec alliance (strategy) is going to be terribly strained (undermined).
The spin form the cons (if they are smart): We are doing better than the US and Japan and the UK.
My guess is a 0.5% annualized increase.
Revised estimate. Given all the new data being staggered about by the banking community like a jug of whisky amidst a murder of drunken sailors, I will revise my guess to -0.1%. I thought about it for many hours and finally succumbed to the pressure to revise upwards!
Seriously it does bring light to the what the GDP represents and how is not great at what is actually does. I think it was Keynes who helped design the GDP but noted that it should not be used to measure a nation’s wealth. However that is exactly what we use it for.
I do recall the GPI made a lot more sense in achieving that goal. I have not seen much of it lately or how it is comparing lately or how it defines a recession.
I recall Hans Messinger at Statcan working for some time on the GPI and did some great work in that regard. I did a search and found this for a general comparison between GDP and GPI see this paper.
http://www.pembina.org/pub/58
Potentially the PEF should report some of these somewhere on the site, with a few of these more progressive measures maybe more people would make more use of them.
Yes that is me plugging Statcan! Actually Hans did an excellent job in attempting to roll out that measure but in the end it was mostly shelved and forgotten in some long lost box of yesterday.
Penumbra as reported above in the link still works with it.
paul
Looks like I may be in the running for winning this afteall according to Don Drummond from the TD bank there is a 50-50 chance that the GDP number will come in the negative range. His prediction is at 0.4% and it looks like the BOC has revised downwards. Gee and here I thought I was getting the hang of his guessing game. So how does any of this reflect reality? That is what I have a hard time coming to grips with. Does it all really mean anything other than we all feel good about doing something? I guess it would be similar to witch doctor rituals when culturally comparing these actions of such highly paid individuals. But being a witch dotor did in most cases carry a high ranking social position. Is this merely ritual, what mask should the BOC governor where when they release the numbers.
I think the skill testing question should be changed to, what figures would the tories paint on Carney’s mask.
For some reason I see pigs, hogs, and maybe the odd snake on this ritual mask.
paul t.
Answer to the skill testing question:
Harper made a statement today that seemingly reveals the answer to the skill testing question. that is if we go into a recession with tomorrow’s numbers, he stated-
“People talk about a technical recession. Even if that’s true, I don’t think it’s a real recession.”
Nice one, tricked us all didn’t he.
“Somebody said a recession is when people start losing their jobs, and when your neighbour loses his job. There are job losses, but overall employment is pretty stable,†Mr. Harper said.
He seems quite comfortable with the kitchen table talk of a recession, but how about when the person he is sitting with get’s up to offer up a snack and the fridge is empty. I wonder if he would use the same words. He is such an arrogant leader.
How did North America get stuck with such mindful leaders, we are blessed.
Why do I feel like John hurt in the movie 1984, especially given the last employment report. You know the line where Richard Burton holds up 3 fingers and says, how many fingers do you see? Unfortunately I still see 3, but I wish I could see four Mr. Harper. I imagine it would all be much easier if we could just pretend that 3 manufacturing jobs were actually 4, however these policies continue to bleed the wealth generating life blood from our economy.
Sorry for ranting, but seeing the US GDP release today, and posting all the job losses and plant closing stories lately to the labourstart page, the contradictions are loud. I am not so sure we will even see the technical recession tomorrow. It is not that I want one, but the reality between what is reported and what is actually going on, is not the industrial reporting straight arrow that you think. One should be careful of what is in your economic quiver. And typically by the time the target is finally hit and the stats based nuance finally sinks into the discourse of rulers finally realize something has to be done, especially with this group of statistic ignoring, wealth destroying, neo-con reform party libertarians, our descent into the economic abyss has already been in full swing.
Imagine calling for an election 2 days after your official stat agency declares you have went into a recession. And your response is to ignore it. That kind of arrogance will be their down fall. That is if a competent opposition can be effective.
paul t
So the Numbers are in: technical growth at +0.1% and first quarter figures revised down to -0.2%. Doing the math we get a technical recession of -0.1% growth for the first eight months.
As an aside, I am now waiting for someone to claim that the solid US numbers and the weak CDN numbers are further confirmation of the de-linking thesis.