Thursday, October 30, 2008

Modest economic slowdown

The contrast between rhetoric and reality is huge. With all the references to how this is the worst crisis since the Depression, you'd think the numbers would be awful. Well, they're not. Third-quarter GDP figures were released today, and it seems the economy shrunk at an annualized rate of -0.25% (translation: the US economy shrank by an infinitesimal 0.06% in the third quarter—so far within the range of rounding errors that it is meaningless to even say that it shrank). This may be the beginnings of a recession (which typically requires two quarters of negative growth), but if so, it looks pretty mild so far.

This chart gives some history for perspective. Things were wild and wooly back in the 1970s, when GDP growth swung between -5% and +10% routinely. Since then, the economy has been on a stabilizing trend. I figure it has a lot to do with the ongoing development of our financial markets. It may be fashionable to blame free markets for our recent woes, but the truth is probably just the opposite: thanks to free markets we have developed instruments, like derivatives and credit default swaps, that very efficiently distribute risk among investors all over the world. Financial markets now act like a shock absorber for the real economy, minimizing the impact of shocks on the body politic.


The Therapist Is In said...

I give Bernanke a C and Paulson a B. It seems that the only thing worse than a severe (?) recession is the fear of a severe recession and it's likely that we are somewhere between fear and reality. Now I am wondering about whether medium vs. large cap companies stand to benefit more than the other. Enjoy your blog and thoughtful expression of the psychology of the market.

Scott Grannis said...