Q3 GDP: Latest Fed Fiction

For years I’ve harped that the Feds’ economic data was phony if not outright fraudulent. But this year, they’ve really outdone themselves.

For the first two quarters of 2008, the Feds maintained that GDP growth was positive. They did this by using inflationary measures that were flat out wrong and by strange increases in various sectors — software, structure spending, etc.

However, after bullying the American public with threats of potential economic contraction if the mega-bailout was not passed October, the Feds had to abandon their policy of claiming economic growth this quarter. After all, they can’t tell us “we need money because the economy is falling off a cliff” and then one month later say “actually the economy is okay. Thanks for the dough, though.”

So it’s no surprise the Feds publicly announced last week that the economy had contracted in 3Q08. However, while they are finally honest about which direction the economy is heading (down), their GPD numbers are still ridiculous.

The “official” Q3 numbers showed an economic contraction of 0.3%. Anyone actually living in the US, rather than la-la land, can tell you that the downturn in their local business or economy has been far greater than that.

For starters, the Fed’s inflationary measure jumped from the absurd level of 1.26% last quarter to 4.09%. However, even this measure is far too low. If we were to go by the pre-Clinton measure of inflation — the most accurate measure ever used by the Feds —  real inflation is around 8% right now. By keeping inflation measures low, the Feds “juice” the GDP growth to the upside (lower inflation = larger net GDP growth).

Then there were a number of phony growth points manufactured by bizarre increases in spending. In particular, the US reported a 7.9% increase in structure spending. Have you or anyone you know seen an increase in government spending on infrastructure? The roads near my place are abysmal. The airports I’ve used have all been shoddy. Where is this spending going?

The Feds also reported a 5.9% increase in exports. Exports to who? Who’s buying American manufactured goods? An even better question would be “what exactly is the US manufacturing that it exports?” Aside from loose monetary policy and crummy mortgage-backed securities, of course.

Besides the phony positive “juicing” factors, there were a few, “less awful than they are in reality” measures. For instance, the Feds claim that 3Q residential investment declined only 19.1%. New housing starts are down 31% from the last year. So the Feds’ data here is fluffy to the upside.

Also, Government Spending increased 5.8%. The Feds aren’t counting the Federal Reserve’s actions here, so it’s not clear to me what exactly the government has been spending money on. Chris Low, Chief Economist for FTN Financial, notes that this data point alone added 1.15% in positive growth to the GDP measure. Take it away, and the economy contracted by 1.45%.

Simply put, this latest GDP data is a joke. The Feds have at least come clean that the economy is contracting (a full year after the fact), but their numbers are still nowhere near reality. This is not only shameful, but a great disservice to ordinary investors.

If the data was more accurate, or if investors scrutinized it more critically, the general populace would have suffered far less financial damage over the last year. By now everyone should know better than to refer to government statistics for insight into the US’s economy or financial condition. Those who did got creamed in October when sudden announcements of economic contraction slammed stocks.

They should teach this stuff in college, not under Economics but Modern American Fiction. If only the Feds' quarterly statements were longer, we might finally see “the Great American Novel.” The only problem is that at this point, it wouldn’t be so great.

Comments

[akenny63:]

Hey, the bogus Fed economic data also affects Social Security yearly increases and TIP's dividends, and no doubt many other inflation tied securities.

2008 Nov 03 12:23 PM

[bbzz24:]

add to this shrinking manufacturing to levels unseen in 7 years.

2008 Nov 03 01:09 PM

[Vox Rationalis:]

More whining from Mr. Summers.

"Anyone actually living in the US, rather than la-la land, can tell you that the downturn in their local business or economy has been far greater than that."

Really? Have you been paying any attention at all to Q3 earnings? Perhaps your confusion comes from a misunderstanding of what a "quarter" is. While few would argue that the economy has slowed dramatically since, say, mid-September, the economy was hardly in a freefall prior to that.

"For starters, the Fed’s inflationary measure jumped from the absurd level of 1.26% last quarter to 4.09%. However, even this measure is far too low. If we were to go by the pre-Clinton measure of inflation — the most accurate measure ever used by the Feds — real inflation is around 8% right now."

Why don't you provide some sourcing to back up your assertions? Can you not NAME what you find to be the "most accurate measure"? Or do you think you're entitled to the benefit of the doubt?

By the way, the latest from BLS (www.bls.gov/news.relea...) says CPI-U rose at an annual rate of 2.6% in the third quarter, compared to 7.9% in the 2nd quarter and 3.1% in the first. I have no idea where your numbers come from.

But can you honestly say that you think that over the last two months inflation has been positive? Based on what? Gas prices? Commodity prices? Milk and toilet paper prices?

"Then there were a number of phony growth points manufactured by bizarre increases in spending. In particular, the US reported a 7.9% increase in structure spending. Have you or anyone you know seen an increase in government spending on infrastructure?"

Now it looks to me like you're trying to quote the recent NBER release (www.bea.gov/newsreleas...) - why not source it? NBER indicates a 7.9% increase in non-residential structures - this does not mean the same thing as government infrastructure spending.

But to answer your question - yes. Around DC, the Woodrow Wilson bridge project continues. The mixing bowl project was recently completed. Construction continues on I-495 and I-395.

"The Feds also reported a 5.9% increase in exports. Exports to who? Who’s buying American manufactured goods?"

Are you allergic to research? Census reports our largest export markets are Canada ($181B for the year through August), Mexico ($101.5B), China ($49.6B), Japan ($46B), the UK ($38.4B), and Germany ($37.4B). Note, this is for both goods and services; goods make up about 70% of our exports, and food products make up 8-9% of our exported goods.

An even better question would be “what exactly is the US manufacturing that it exports?”

You would be surprised, if you bothered to look into it. Here, let me help: www.census.gov/foreign...

"Aside from loose monetary policy..."

The ignorance continues.

"...the Feds claim that 3Q residential investment declined only 19.1%. New housing starts are down 31% from the last year. So the Feds’ data here is fluffy to the upside."

Do you not understand that housing starts at residential investment are not the same thing? The numbers are entirely compatible. Why? Housing completions were down 20% from the previous year. Also, housing construction is counted binarily, regardless of the number of residential units; an apartment building is one "start." In September 2007, the under-construction split between single-unit structures and those with 5 or more units was 60%/37%. In September 2008, it's 50/47. Since apartment buildings generally cost more to construct than SFH, overall spending will decrease less than the number of structures under construction (www.census.gov/const/w...).

"Also, Government Spending increased 5.8%."

No idea where this number comes from. It's not in the NBER release.

"Chris Low, Chief Economist for FTN Financial, notes that this data point alone added 1.15% in positive growth to the GDP measure. Take it away, and the economy contracted by 1.45%."

So? Are you trying to say that government spending, which accounts for some 20% of GDP, doesn't count?

"Simply put, this latest GDP data is a joke. The Feds have at least come clean that the economy is contracting (a full year after the fact)..."

A year? You have no credibility whatsoever - on what do you base a year's worth of recession? Unemployment? Nope. Wage deflation? Nope. Please, provide something - anything - to back up your assertions.

"If the data was more accurate, or if investors scrutinized it more critically, the general populace would have suffered far less financial damage over the last year."

Again, based on what?

"By now everyone should know better than to refer to government statistics for insight into the US’s economy or financial condition. Those who did got creamed in October when sudden announcements of economic contraction slammed stocks."

Really? How many recessions have we had since 1950? How many times has the stock market reacted this way? The recessions of 1982-3 were certainly worse than what we've yet seen, and the market didn't react as it did this time.

You've got no evidence. You don't even have logic. Which means, really, you don't have an argument. You're just raving.

2008 Nov 03 02:13 PM

[DOR:]

Silly me. I thought it was the Bureau of Economic Analysis, and not the Fed, that generated gross domestic product data.

Gosh, how could I have been so wrong?

I guess I'll just never be as clever as the people here . . .

2008 Nov 03 10:43 PM