http://www.themoneyillusion.com/?p=6477The new GDP figures include some pretty significant revisions of the past data. Most people have focused on the fact that the new figures show a significantly bigger drop in 2009 GDP than originally estimated. Even the original 2009 NGDP figures showed the biggest drop since 1938, but these have been revised further downward.
It appears to me that most of the revision is based on changes in the third quarter of 2008. Before discussing those revisions, I’d like to talk about why that quarter is so important. The standard view of this recession is that the housing slump of 2007 triggered a moderate banking crisis and a very mild recession at the beginning of 2008. Then after Lehman failed, the banking crisis got much worse, and therefore the recession became much worse.
My view has always been different. I agree with the standard interpretation of the original, and relatively mild, recession of early 2008. But I argued that the recession worsened dramatically before Lehman failed, and that this led to a decline in NGDP growth expectations that severely reduced asset prices and made the banking crisis much worse.
One problem with my view is that it seemed like the severe fall in GDP (real and nominal) began in the 4th quarter of 2008, which was after Lehman had failed in mid-September. Initial reports showed only a 0.3% fall in 2008:Q3 RGDP. As a result, all I could do was rather pathetically argue that July was a strong month, and point to the fact that industrial production (which is measured monthly) suddenly began falling sharply in August 2008. And that this showed the economic weakness had spread out of housing even before Lehman failed.
