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Thursday, May 01, 2008

Rockefeller Institute Flash Report

Rockefeller Institute issued a flash report on state tax revenues. You can get the report here. Calculated Risk has some coverage in this post.

This is preliminary, based on partial reporting, and does not have all of the adjustments. Nonetheless, it is obvious from Q1's weak PCE that the full quarterly report will show that once again, inflation and legislatively adjusted tax revenues from CIT, PIT and SUT dropped for the third quarter in Q1.

This is why I am so sure that the economy is in recession. It is likely that NBER will revise GDP down later, but it matters not. By the fourth quarter of 2007, Gross Private Domestic Investment was negative and there was a hefty decline in the Rockefeller data. Those two things can only happen in recessions. If you would like to look at the Rockefeller Institute data through the end of 2007, the spreadsheet is here.

You may wonder why GDP is reported as positive when I keep insisting that the economy is in recession. Well, the reason that GDP is positive while Rockefeller and Gross Private Domestic Investment are declining is that Rockefeller uses a different inflation adjuster - the BEA state and local government implicit deflator. If you stop to think about it, governments spend money on much the same items as the average consumer. They buy food, fuel, utilities, vehicles, supplies, etc.

Rockefeller went marginally negative in Q3 2007, and substantially negative in Q4. It's obvious that it will be negative in Q1 2008.

With negative domestic investment and no increase in spending to adjust for it, the economy slipped from low growth to recession last year. Nor has anything changed since - the acceleration into decline is picking up pace.

In yesterday's advance GDP, state and local spending showed a much lower growth rate than federal. It is likely that state and local spending will be one of the factors that tends to extend the economic weakness this time around.

Here is a graph showing splined Rockefeller data plus the change in Gross Private Domestic Investment. For some arcane reason known only to the twisted M_O_M mind, I always do this starting with the recent data, so the end of 2007 is on the left. Maybe I'm feeling Chinese when I get to this point or something.

The ovals show the point of no returns for the last two recessions. Note the coordinated plunge of spending and domestic investment at the end of 2007.
The difference between mid-cycle slowdowns and the beginning of recessions is that the state receipts will stay pretty good. It's the spending which carries the overall economy through business cycle adjustments. When it doesn't, a recession results.

Click on this and it should open up in a larger window for you.

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