The Negative 10% GDP Growth Unmasked

by: Thomas Blankenhorn

As most of us know, the economy is not in as good of shape as the government and the media want us to believe. It's understandable to promote confidence, however, when there is so much propaganda that must be thrown about, the public should be awaken to see that there is a desire to push growth to unsustainable levels.

Our government claims we have a positive GDP growth rate. The media offers no insight into breaking down the numbers and simply thrusts onto the public in whatever the government claims. The GDP growth rate is computed by subtracting the REAL rate of inflation from the nominal GDP growth rate. There are other equivalent formulas but this is more direct, without the use of introducing other terms such as a GDP deflator. The inflation rate that our government conveniently uses is one that excludes the effect of food and energy inflation yet the GDP retains the effects of the inflation of food and energy! This is a crucial concept for which the public must be made aware. In addition, there is the REAL rate of inflation going beyond what the government claims.

We can all state the price of gas today versus last year, provide numerous food price examples, and costs of other items we must pay for in our daily lives to say without a doubt that the government severely underestimates the rate of inflation. To obfuscate the inflation rate, there has been an amazing development in recent years in downsizing product sizes. A can of tuna use to be 7 oz then got reduced to 6 or 6.5 oz cans, depending upon the brand, and now 5 oz cans have become the new standard. Prior 16 oz packages have turned into 15, then 14, and in some instances 12 and even 10 oz packages! Yogurt, once commonly sold in 8 oz sizes, have been downsized to 6 oz. Ice cream, formerly packaged in half gallon sizes, began to be reduced down to 1.75 qt just a few years ago and now 1.5 qt sizes are showing up. Prices generally increased for the lowered package sizes but even considering when the prices remained constant, the insidious inflation can be significant. For example, a 16 oz package reduced to 14 oz contributes to 12.5% inflation. When the product sizes do not get reduced, the inflation is more readily apparent. I can provide two examples of food item prices that are stuck in my head that can demonstrate the dramatic increases in the past year. A common, brand of cheese use to cost $5.99 per a 2 pound package but in the last 2 months, there have been two price increases, to $6.99, and then to $7.49. For an off-brand macaroni and cheese dinner, the price went from 36 cents to 42 cents to now presently 50 cents! Charting the inflation rates for these two food examples per various ways is shown below:

Food Item Initial Price Final Price Time Period (months) Annualized Inflation Rate Inflation Rate, Assuming Price Increment Is Based On A 1-yr Average Inflation Rate, Assuming Price Increment Is Based On A 2-yr Average
Cheese $5.99 $7.49 2 150% 25% 13%
Mac & Cheese $0.36 $0.50 6 78% 39% 19%

Being that food prices are not adjusted in a continuous fashion at the retail level, price adjustments will be irregular and sometimes delayed. These factors make it difficult to calculate a true rate of inflation per specific food item over a short time span. For this reason, two additional data points are shown in the above chart with the 1 and 2-year increment averages. The 2-year average should be treated as a distant boundary. Even with the low-end guesstimates of the average inflation for the above two food items, they are nowhere close to the government claimed 2% inflation rate. Of course there will be differentiation in inflation rates for individual items, but when lists are compiled comprehensively, even if just performed mentally without putting it on paper, one should quickly come to the conclusion that the government figure is bunk.

Now, let's dive into some concrete numbers of inflation put out by the government. The official claim is that the current GDP growth rate is 2%. It's interesting to see, that just like for prior months of job additions usually gets revised downward, the GDP growth rate will also get revised downward, In fact, for 2012 Q2, the figure got revised down from 1.7% to 1.3%. It's as if the numbers pushed onto the public are all meant to pump up the stock market and then a number closer to the truth appears later, after the market got pumped up and the hot air doesn't come out upon such disclosures.

The rate of inflation can never be a precise figure. At best it will be an estimate. This is because of many factors, some of which are changing buying habits, such as buying more chicken as opposed to beef so that the impact from beef prices would count less, product quality changes such as computers having more features with newer models yet without a linear price increase per the features. The alternate inflation rates based on the pre-1990 methodology with important statement backing up the derived figures are what I will incorporate here. There is the pre-1980 methodology for calculating the rate of inflation that makes the present government claimed inflation rates even more far off from reality, but in accepting the pre-1990 for the work-up to follow would show such a dramatic difference in the GDP growth rate that one could then have an idea that even these numbers don't quite show the extent of how bad our economy is.

The BEA (Bureau of Economic Analysis) is the source for the nominal GDP, nominal GDP growth, and real GDP growth rates in the table below (Year 2006 Nominal GDP was $13.4T):

Real GDP Growth Rate, with Actual Monetary Inflation, Population Inflation, and Federal Deficit Adjustments
Year Nominal GDP ($T) Nominal GDP Growth Real GDP Growth (Gov claimed) Implied Inflation Rate Alternate Inflation Rate Amended Real GDP Growth Population Inflation Rate Federal Deficit ($T) Federal Deficit Percent of Prior Year Nominal GDP Final Real GDP Growth
2007 14.0 4.9 1.9 3.0 5.8 -0.9 0.9 0.161 1.2 -3.0
2008 14.3 1.9 -0.3 2.2 6.8 -4.9 0.9 0.459 3.3 -9.1
2009 14.0 -2.2 -3.1 0.9 2.3 -4.5 1.0 1.41 9.9 -15.4
2010 14.5 3.8 2.4 1.4 5.5 -1.7 1.0 1.29 9.2 -11.9
2011 15.1 4.0 1.8 2.2 6.5 -2.5 1.0 1.30 9.0 -12.5
2012 to Q3 15.6 3.6 1.9 1.7 5.8 -2.2 0.9 1.09 7.2 -10.3

Now, why is the population inflation utilized? It's obvious yet it's one that is avoided by government and the complicit media. In accounting for the population growth rate, the GDP growth would be shaved by a percent! They simply do not want the public to catch wind of our sour economy. Everyone is to wear rose-colored glasses and feel joy with the numbers the government puts out. Population inflation must be treated similar to monetary inflation. They each contribute to the GDP. Imagine if the population doubled, assuming no inflation, wouldn't you expect the GDP to double? Of course! But would this mean the GDP growth rate went up? Yes, and no. It does on a raw number basis, but on a per person basis, it does not, which is what really matters when assessing the state of being of the people. Now suppose the GDP went up ONLY 50% yet the population doubled in size, would everyone be celebrating on the big increase of the GDP? Absolutely not, as this would mean the GDP on a per person basis got reduced by 25% (1-1.5/2), and this surely would be nothing to be cheerful about. I hope this is well understood. I propose that all economic data be adjusted for population growth, whenever pertinent so the public will obtain a better picture as to the health of the economy.

Why is the federal deficit percentage of the nominal GDP of any relevance to the GDP growth rate? Well, it's money that needs to be accounted for as it is money is going into the economy and as such it should show up in the GDP figures. A visual justification of the adjustment can be seen with the following example whereby the population and monetary inflation rates are held constant:

Example of Deficit Spending Adjustment to the GDP Growth Rate

Successive Year Nominal GDP ($T) Federal Deficit ($T) Nominal GDP Growth Rate Federal Deficit Adjustment to Force Real GDP Growth to Zero
13 -- -- --
14 1 1/13 -1/13
15 1 1/14 -1/14

And so, with this more robust statistic showing the GDP growth rate with adjustments of the inflation rate without the tainting by the government, the population inflation rate, and taking into account the federal deficit spending, one can assess the macro economy. Seeing these figures should mesh well with what many of you feel is really going on.

More than just feeling how bad the economy is, but in finally seeing the numbers jump at you in print, the public should then be alarmed to the extent of demanding change from our leaders so we can promote prosperity. The last several years was not just more of the same old incompetence shown by the leaders but there has been great coddling of the wealthy by manipulating the stock market up at the expense of the many.

Just what kind of market multiple should be attributed to the stock market with this information? As I said in my last prior blog, "This 2X Overpriced Stock Market", we are in no average time and so when trying to reconcile this market to any sort of average PE value is negligent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.