Last week’s GDP numbers
This weekend I received a disturbing newsletter from John Mauldin, provacatively entitled ” Lies and Other Statistics,” that dissected the GDP numbers where the headline number was +0.6%. Digging into the detail reveals a completely different picture altogether.
We are in recession
It is in the best interest of the U.S. Federal Government to paint a positive picture. The GDP numbers help to do that, as they have signaled to some analysts like Larry Kudlow that we are in fact, not in recession. However, the truth is that the American economy is in recession. Everyone knows it and everyone can feel it. Let’s look at the numbers.
The GDP report as released by the Bureau of Economic Analysis (BEA) shows a +0.6% gain in GDP for the 1st quarter (Jan.-Mar.) 2008. This number is obtained by measuring nominal GDP and by subtracting a measured inflation rate. Therefore, to examine potential problems with the numbers one must look at problems in nominal GDP calculation and in measured inflation rates.
Because these figures are substantially revised when more detailed data on the state of the economy come in, most savvy analysts cannot take them at face value when first reported. For example, the GDP was revised downward for the period during the last recession, showing that the recession began in Q3 2000, where GDP was revised down (way after the recession had ended) to reflect -0.5% in GDP growth.
BEA’s inflation measure
John Mauldin first hones in on the inflation number saying:
“Nominal GDP in the fourth quarter grew by 3%. In the first quarter it was 3.2%. They figure that inflation was 2.4% in the fourth quarter and 2.6% this quarter, giving us the slightly positive growth numbers.
There are several government agencies which track inflation. And in fairness, inflation in an economy as large as that of the U.S. is a very tricky thing to measure. The Consumer Price Index (CPI) is done by another division of the Department of Commerce, the Bureau of Labor Statistics.”
After displaying a table of the recent CPI numbers, the most commonly used inflation measure for the US, Mauldin then goes on to say:
“Note the string of five consecutive months of 4%-plus inflation, and that the average for the 4th quarter was 4%, while for the first quarter of 2008 it was over 4.1%. Never mind whether that is the right number or whether there are problems with how they calculate it – that is a story for another letter. The key here is that if the BEA used the BLS number (remember, both groups are in the same Department of Commerce), it would show the economy shrinking by 1% in the 4th quarter and by almost 1% in the first quarter. That is not what the happy-talk analysts are saying.
But let’s use the Fed’s favorite measure of inflation, personal consumption expenditures, or PCE. The PCE has been about one-third less than the CPI since about 1992. The difference is in the way they are calculated. The CPI uses a weighted average of expenditures over several years. As I understand it, the PCE tracks changes in relative expenditures from one quarter to the next, assuming that consumers change their habits as prices rise and fall. In simplistic terms, if steak gets expensive, we substitute with hamburger or chicken. One index tracks those changes over years and the other (PCE) does it over quarters. Also, the PCE only tracks personal consumption and not imports or inventories.
If we use the PCE numbers (yet another measure using Commerce Department data), inflation was about 3.3% for both quarters, which would mean negative growth quarters by a few tenths of a percent. That would also mean two quarters of negative growth and a recession.”
The long and short is that by using any other credible measure of inflation, the U.S. is in recession right now. The BEA inflation measure does not hold water.
BEA’s nominal GDP measure
Mauldin goes on to pick apart the GDP measure as well. He says:
Further, GDP in the first quarter was helped by inventory build-up to the tune of 0.8%. In times of expansion it is good to see inventories grow, as that means companies are optimistic. But when the economy begins to slow, growing inventories mean that companies anticipated sales that did not materialize. That means that as inventories are allowed to fall in the second quarter, they will show up as a negative factor in second-quarter GDP.
But all these numbers will be changed in a few years, as looking back over several years is the only way we can get somewhat accurate numbers. My bet is that the numbers for GDP will be revised down when the economy is well on its way to recovery. It will show up on page 16 of the Wall Street Journal and no one will care. That is what happened when we found out a few years later that the last recession started in the third quarter of 2000. The initial numbers were positive.
In essence, if manufacturers were not making so many products that no one is presently buying, the GDP number would be even worse.
Any reasonable person would have to conclude that the government’s GDP numbers, subject to significant revision and using dubious nominal GDP and inflation figures, cannot be trusted as a signal of recession. The economy is likely to have contracted in Q1 2008 and the recession likely began as early as Dec. 2007 or Jan. 2008 when the economy began to lose jobs.
But, ultimately whether the economy is in recession or not doesn’t really matter. Whether we have been experiencing a substantial slowdown or a recession, the economic pain is largely the same. What does matter is the trustworthiness of the figures our government releases. The American people deserve an economic report that is more in line with realities on the ground.
Are the governments numbers for real?
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