The estimate of U.S. Gross Domestic Product was released on Friday. As expected, the fourth quarter of 2008 was worse than originally reported. The initial report was suspect because of inventory valuations and inflation adjustments, whose accuracy are improved as more data are collected and fewer estimates are used. The original report was -3.8%, and it was revised to a whopping -6.2%, the steepest decline since Q1-1982, the deepest recession we have seen in recent years and the one that is most similar to our current one.

I still believe that Q4-2008 was the worst of it and that we will have a very slow trudge out of this. It has been amusing to listen to pundits say things like, “people can only put off purchases for so long,” or, “eventually there will be so much pent-up demand that things will turn around.” Pent-up demand is always a spurious argument because it means that there is also a pent-up supply to fulfill the demand. Without investment, there is no supply.

My greatest concern is the doubling of the money supply, as noted below. With such a decline in GDP, which is the production of goods and services, combined with this steep rise in the money supply, you have too few goods chasing too much money, the classic monetarist definition of inflation. The recent CPI and PPI reports for January were comforting on a year-year comparison. When the monthly figures are annualized, the CPI was almost 5% and the PPI was over 9%. Month-month changes can be erratic, but they need to be watched.