I Call "Shenanigans" on GDP!

Shenanigans!

At the risk of sounding shrill, I am compelled to point out the quantum bogosity of this 3.9% GDP number: It is highly dependent upon a rather suspect reading of Price Increases/Indexes for Gross Domestic Product: The Price Deflator rose a much less than expected .8% vs expectations of 2%.

The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures [PCE], exports, federal government spending, equipment and software, nonresidential structures, private inventory investment, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The slight acceleration in real GDP growth in the third quarter primarily reflected accelerations in PCE and in exports that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures.

Price Indexes for Gross Domestic Product was an astounding low 0.8% (Table 4 - pdf file). In other words, this report benefited as much from higher inflation as it did from true growth.

I obviously take issue with that (as Crude Oil crosses $94 for the first time).

To highlight the impact that this 0.8% price gain had on the reported REAL GDP: that 0.8% gain matches a level last seen in 1998; prior to that, the previous deflator gain of .8% was in 1963.

Peter Boockvaar of Miller Tabak observes that "with the dramatic upturn in energy prices and other commodities, the decline in the Price Deflator is obviously unsustainable. The consensus today for Nominal GDP was 5.1% and came in today at 4.7%, thus weaker than expected. Q3 GDP was fine , but not as good as the headline report reads."

The average of the price index since Q1 2004 to Q2007 was 2.98, ranging from a low of 1.7% to a high of 4.2%. Thus, if the deflator matched consensus, it would have generated a GDP of 1.9%; if it was at its recent 3 year average of 2.98%, GDP would be ~1%.

I suspect that a more accurate GDP reading would be somewhere in between . . .

GDP Price Shenanigans! (click to enlarge)

Chart courtesy of Bloomberg

Sources:

GROSS DOMESTIC PRODUCT: THIRD QUARTER 2007 (ADVANCE)
WEDNESDAY, OCTOBER 31, 2007
http://www.bea.gov/newsreleases/national/gdp/2007/pdf/gdp307a.pdf
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Economists React: GDP Growth ‘Not Built to Last’
October 31, 2007, 10:16 am
http://blogs.wsj.com/economics/2007/10/31/economists-react-gdp-growth-not-built-to-last/

Comments

[CrossProfit_:]

We agree with you on this.

It appears that someone erroneously used core inflation components instead of all components. However, crude at $94 is not a factor in this number. Crude was at $85. We suspect that net GDP (using correct deflator) is actually lower than 1%. This will either be corrected or show up next time as a big swing.

We don't think that the market could stomach a GDP figure coming in at 1% or lower just now. We are not saying that this was intentional, but there seems to be an obvious discrepancy here.

In a previous comment on SA we pointed out, without actually calling the figure 'bogus' as you are that true GDP has to be based on all inflation, not just core figures. If you look at this carefully, the discrepancy miraculously matches the difference between the two.


CrossProfit

2007 Nov 01 08:58 AM

[wixeywaxy:]

I was taught as a young man by a wise old guy in our community that the government always lies. What is incredulous to me is that as obvious as that has become the public at large still like sheep believe (for the most part) most of what they are fed. You can't be very well informed of history or observant of your surroundings and not realize the unfortunate truth of my mentor observation. WW

2007 Nov 02 08:53 PM

[Worf:]

Brain overuled instincts last year when I trusted the government to maintain the value of the currency. Won't make that mistake again.
Would have matched the S&P had I gone with that basket of currencies - with much less risk.

Suspect the real GDP is actually negative right now....but you'll never here that argument if you listen only to the popular press. They question not....and yabber only the party line.

An even bigger question? Why are we paying for all these government statistics if they bear no relationship to reality?

2007 Nov 03 04:42 PM