What Can Turn GDP Figures Around?

So the economy didn't contract at a 3.8% pace in the fourth quarter after all: it actually contracted at a 6.2% pace, the worst reading in 26 years. What does this mean?

Well, for one thing, it means that I need a new bucket for my GDP statistics. Back in July I said that these things are so vague that it doesn't really make sense to look at the numbers to one decimal point: better to just lump them into buckets marked "good", "mediocre", and "bad". Well, -6.2% is worse than "bad": we need to add a "terrible" category to the list.

There's also a tug-of-war here between two opposing forces: mean-reversion is fighting against a downward economic spiral. Often, with GDP figures, a bad number in one quarter means a better number in the next, thanks to mechanisms such as cyclicality in inventories. On the other hand, when GDP numbers get really bad, the effect on the nation's animal spirits can make the next quarter even worse. And I have a nasty feeling that at this point the GDP figures are behaving a bit like bank stocks: the lower they go, the lower they go.

It's already pretty certain that first-quarter GDP, too, is going to be in the "terrible" category. Can we really bounce out of this bucket and into the "good" bucket in the second half of the year, as Ben Bernanke seems to think we can? Well, he's the macroeconomist. I'm just a consumer, I guess, who's feeling a decided lack of desire on the part of the people around me to either spend or borrow. And I'm not at all clear on what's going to turn those sentiments around.