This Doesn't Look Like A Recovery

Part 1: What’s Happening in the Economy

• What do the numbers in the most recent GDP report tell you about the economy?
  • At face value the economy is growing at an annualized rate of 1.88%
  • That entire growth can be accounted for by increases in consumer spending on goods and services
  • Growth in commercial activities and contraction in governmental spending essentially offset each other
  • Growth in exports and imports also almost completely offset each other
  • These numbers are actually very poor for an economy that is supposed to be nearly three years into a recovery

• Do you see any other things to worry about in the numbers?
  • As anemic as the numbers are, they are probably boosted by an understatement of inflation (remember: lower inflation = better growth numbers).
    • The report assumes annualized inflation during the quarter of only 1.65%.
    • Annualized CPI-U (all items, including food and energy) was actually running at 3.69% during the quarter.
    • The “Billion Prices Project” (BPP) measurement of on-line prices recorded annualized inflation of 4.05% during the quarter.
    • If the CPI-U was used to correct for inflation (as a “deflator”) the headline number would have been -0.13% (while using BPP it would have been: -0.49%)
• Per capita disposable “real” income continued to shrink — even using the BEA’s optimistic “deflators”.
• When the shrinking household disposable income is combined with the fact that the headline number comes completely from growing consumer spending it is obvious that the growth in consumer spending is neither organic nor sustainable until jobs turns around
• Where has the money for the spending come from?
  • Savings rates have plunged from 5.6% to 3.6% over the past 18 months, resulting in additions of $200 billion an annual spending
  • Student loans have added over $100 billion annually to consumer spending
  • Refinancing of home mortgages has increased consumer disposable cash by roughly $50 billion per year
  • Strategic and involuntary mortgage defaults have added another $80 billion per year in consumer disposable cash
  • Totaling all of these sources ($430 billion total spending) added 2.8% headline GDP growth
• Additionally, every penny of gas price movement adds or subtracts $1.33 billion of consumer discretionary cash
  • In late 2011 the drop in gas prices would have shifted +$100 billion per year into consumer discretionary spending
• And lastly, the BEA is notoriously bad at calling “turns” in the economy:
  • They initially recorded growth (up to +1.0%) for what was actually the first quarter of contraction during the “Great Recession”
  • They eventually got the “contracting” part right only after a 16 months lag
  • They finally got the “ballpark” magnitude of the contraction right after a total of a 40 months lag
• What this really means is that we may well already be a quarter into the next recession, and the BEA will tell us all about it some two years from now.

Part 2: What is wrong with government numbers and what is the best way of using real time data to create ongoing snapshot of economy?

• What do you see is wrong with the Government’s numbers?
  • First of all, the methodologies are antiquated:
    • The methods were initially designed by Wesley Mitchell in 1937 to capture what was important in 1937 — the factories employing FDR’s supporters
    • The data collecting involves sampling a relatively few large firms (less than 1% of all US corporations) and extrapolating to the whole economy
    • The sampling is heavily weighted to “product” (hence the “P” of GDP) and inventories
    • The sampling is done on a quarterly cycle, with estimates published at the end of the next three months
    • The methodologies also fail to capture economic changes since 1937:
      • The “financialization” of the economy
      • The growth of the service sector
      • The growth of intellectual property commerce (e.g., consider iTunes — no factory and no inventories)
      • The globalization of all aspects of the economy
      • The speed and scope of asset transfers

• Other than being sadly dated, what else bothers you about the methods used?
  • The sampling methodologies interpret a “no-response” as the factory doing the same as prior quarter
  • The extrapolation of a relatively few large businesses to the entire economy breaks down if scale impacts economic health
    • The sampled firms (e.g., Wal-Mart and Exxon-Mobil) are mostly S&P 500 firms, with access to nearly free credit via bond markets and international cash flows
    • Their health is not indicative of what’s happening on “Main Street” any more than Bill Gate’s income mirrors “Joe Sixpack”
• The numbers exclude governmental transfer payments (e.g., social security, medicare, food stamps and unemployment insurance)
• The numbers also exclude governmental debt servicing (interest) costs at all levels of government
• The headline number is critically dependent on “deflators” that correct for inflation
  • The BEA’s deflators can often disagree substantially with inflation numbers from sister governmental agencies
  • The initial reporting shows historical biases to under reporting inflation, producing an upward bias in real-time reports
  • The “deflators” are also used to convert inventories each quarter into dollar amounts, creating artificial swings in inventories

• Is there a better way to collect and interpret macro-economic data?
  • In 2012 we can collect vastly more data on consumption — in fact it’s easier to collect than production or inventories
  • An intrusive but properly mandated governmental agency could now capture nearly every aspect of the real economy from credit card and bank transactions alone
  • Enterprise scaling biases can be addressed by sampling millions of institutions, not thousands
  • Real-time changes in prices could be captured, or better yet capture changes in unit quantity demands

• What is available today as an alternative to governmental reports?
  • You guys have done a great job by taking on the almost real-time measurement of employment data
    • Tax deposit data is available on a daily basis, a vast improvement over BLS data and not subject to sampling or survey biases
    • Tax collection data is also more comprehensive than, for example, ADP data — which covers mainly mid-sized employers
    • Tax collection data also captures deposits for governmental employees, which private payroll sources can’t
• I think that inflation data can be captured very effectively from the web
  • The Billion Prices Project (“BPP”, originally from MIT) is a good example, capturing daily price changes
  • The BPP actually tracks CPI-U fairly closely (leading somewhat), and last quarter was about a half percent higher
• At the Consumer Metrics Institute we have attempted to capture daily changes in consumer demand
  • We capture web based demand for consumer discretionary spending, mostly on durable goods