The Bureau of Economic Analysis (BEA) has released GDP figures for the third quarter. This "advance" number indicates that the economy contracted in the past three months at annual rate of 0.3 percent. This number, however, may change when the BEA releases the "preliminary" figure -- an estimate based on more comprehensive data -- on Nov. 25.

If you've heard or read news media reports of this number, they've probably also informed you that a recession is defined as "two consecutive quarters of economic contraction (or negative GDP growth)". This is an oversimplification. The private, nonprofit National Bureau of Economic Research (NBER), which is authoritative in declaring recessions, defines a recession as:

...a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

In an FAQ on their recession dating procedure, NBER elaborates on the "two-quarter" rule:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. The most recent recession in our chronology was in 2001. According to data as of July 2008, the 2001 recession involved declines in the first and third quarters of 2001 but not in two consecutive quarters. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

Image by Flickr user su-lin used under a Creative Commons license.

Treasury Secretary Henry Paulson took time out of his busy schedule nationalizing recapitalizing banks to announce with OMB Director Jim Nussle that the federal budget deficit for FY 2008 was $455 billion or 3.2 percent of GDP. The deficit- a record in nominal dollars -- had been projected by the Congressional Budget Office last week to be $438 billion.

At $455 billion, the deficit for FY 2008 was $293 billion higher than the deficit for FY 2007. The deficit increased to 3.2 percent of GDP, up from 1.2 percent of GDP for FY 2007. As a percentage of GDP, the FY 2008 deficit was the largest since the deficit of 3.6 percent of GDP in FY 2004, but below the peak postwar deficit in FY 1983 (6.0 percent).

Joint Statement of Henry M. Paulson, Jr., Secretary of the Treasury, and Jim Nussle, Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2008

Some said it couldn't be done. Others doubted his resolve. But it looks as though President George Bush has broken his own record this week - the largest budget deficit on record. Woohoo! The Congressional Budget Office (CBO) has released new estimates on the federal budget deficit for FY 2008 - which they believe will come in at an incredible $438 billion, or 3.1 percent of GDP. This shatters Bush's previous record set in 2004 of $413 billion.

CBO Director Peter Orszag blogged about the estimates yesterday:

CBO released its Monthly Budget Review today. Based on data from the Daily Treasury Statements, CBO estimates that the federal budget deficit was about $438 billion in fiscal year 2008, $276 billion more than the shortfall recorded in 2007. (The Treasury Department will report the actual deficit for fiscal year 2008 later this month.)

Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.

An Associated Press article published today rips into President Bush and his administration's fiscal record, noting "virtually every administration promise on the deficit has failed to come to pass," and "a later promise to cut the deficit in half by the time Bush leaves office is in tatters, and virtually no one takes seriously his proposed path to a balanced budget by 2012." Ouch!

Related Resources:
AP Story: U.S. Budget Deficit Hits Record $438 Billion For Year
CBO Blog: Monthly budget review: FY 2008 deficit of $438 billion
Statement of Senate Budget Committee Chair Kent Conrad (D-ND)

Stan Collender ponders the bottom line of the Troubled Asset Relief Program (AKA "TARP", AKA "Wall Street Bailout", AKA "financial rescue", AKA "Just Trust Us") and what it means for the next administration inthis week's Fiscal Fitness column.

Because of TARP, my estimate is that the budget deficit could easily reach or exceed $1 trillion this year. This includes my estimate of a $600 billion? deficit before TARP and an additional $400 billion afterwards. A deficit of? that size would be between and 6 percent and 7 percent of gross domestic? product, a level that hasn't been reached since fiscal 1942-1946 when the? United States was fighting and paying for the direct costs of World War II.

But the bigger cost of TARP may well be less in dollar terms than in? making progress in other areas. A $1 trillion, 7-percent-of-GDP deficit? likely will chill most of the spending and taxing plans of whoever is? elected as hoped-for tax cuts and spending increases have to be delayed.? There could even be a big push for deficit reductions if the market reacts? very negatively to the 1-year, 10 percent increase in the national debt and? interest rates are pushed higher by the bond market vigilantes that were so? evident at the start of the Clinton administration.?

Last night, the Senate approved a financial rescue (or Wall Street bailout) bill, HR 1424, by a 74-25 vote. As we noted yesterday, the package includes not only a provision that grants the Treasury Secretary $700 billion to purchase troubled financial assets, but also a package of tax cuts passed previously by the Senate.

According to the Congressional Budget Office (CBO), the ten-year cost of the tax cuts, which include a fully-offset set of tax incentives for renewable energy production; an extension of dozens of miscellaneous individual and business tax cuts; and a $64 billion patch for the Alternative Minimum tax, would total $107.1 billion. The CBO, however, indicates that the cost of the asset purchase program is "impossible at this point to provide a meaningful estimate of the ultimate impact on the federal budget from enacting this legislation," but would be "substantially smaller than $700 billion." Nor can CBO estimate the cost of increasing FDIC limits on insured deposits.

Congressional Budget Office: Letter to Honorable Christopher J. Dodd (estimated budgetary effects)
Joint Committee on Taxation: Estimated Budget Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to HR 1424