What Was Last Quarter's GDP and Inflation Rate?

Yesterday's report on U.S. economic growth had something for everybody. For the optimists, it was surging exports and a government stimulus induced boost to personal spending that pushed second quarter annualized real growth to 1.9 percent.

For the pessimists, it was the massive downward revisions to prior data that, during the fourth quarter of 2007, produced the first negative growth number since 2001.

What's most interesting, however, is the nature of the revisions going back more than three years that effectively lopped two percentage points off of economic growth during that period. The revisions to major categories are shown below.

As seen in the shrinking blue bars, the contributions to percent change for personal consumption were revised downward by about a half percentage point in 2005 and 2006 with nearly a full percentage point reduction in 2007, most of this occurring in the fourth quarter.

Revisions to the other categories roughly canceled each other out - net exports up about a half percentage point, government spending down an equal amount, and little change to domestic investment.

When looking at these four major categories over time, the consumption binges are clear to see - in the years prior to the tech bust in 2000 and leading up to the housing bust in 2006 - but the surge in exports in recent quarters is quite remarkable.

Improving exports, driven largely by a weaker dollar, have been one of the few bright spots for the U.S. economy since the housing bubble turned into a housing bust.Obviously, private domestic investment remains in a funk and, not surprisingly, government spending is growing steadily. Over the last year or so, government spending has been responsible for about 25 percent of overall economic growth.

If government spending and exports were removed from the data, economic growth would have been negative in four of the last seven quarters. This measure turned negative for only three quarters during the last recession in 2001.

With yesterday's Commerce Department report on economic growth during the second quarter, two more pieces can be added to the puzzle of the annualized inflation rate from April to June (that is, when the price of oil rose from $100 a barrel to $145 a barrel):

• GDP Chain Price Index: 1.1 percent
• PCE Price Index: 4.2 percent
• Consumer Price Index: 7.8 percent

Aside from declining home prices apparently being included in the first item (a handy thing to help avoid lower GDP numbers) and slightly different weightings, does anyone know how these can be soooo far apart?

Comments

[User 143167:]

Answer to your Puzzle:

Import price inflation is a positive factor in CPI and PCE, but a negative factor in PCE. Remember that Import is a negative item in the GDP calculation? So import price inflation reduces the deflator and boosts the real GDP. This makes the huge gap.

Look at the import price index at 20% YoY growth, can you believe it is actually a good thing to our GDP calculation? But you can look at it the other way. The US dollar is in a big slump so the US economy denominated in the greenback is still "increasing". If you calculate it in other currencies or gold, this economy is jumping over the cliff already.

2008 Aug 01 10:52 AM

[User 143167:]

correction:
Import price inflation is a positive factor in CPI and PCE, but a negative factor in Deflator.

2008 Aug 01 10:52 AM

[Matt Blackman:]

Here is the reason. The government reverse engineers CPI and PCE data to give the desired result. After all this is an election year and the incumbent party whether Republican or Democrat, have shown a remarkable ability to juice the economy leading up to each election. Statistics are a big part of this task. History has shown that a party heading into an election with an unhappy or unemployed voter have a snow-ball's chance in hell of getting re-elected. As a result the NBER (and Commerce Department) won't confirm we are in an election till after the election since this would make the chances of a Republican win even slimmer.

This explains why 93% of all Dow gains have occurred in the 26 months leading up to elections compared to just 7% in the 22 months after.

CPI and PCE show little basis in reality.

Conclusion? Investors relying upon CPI or PCE to make investment decisions do so at their peril.

2008 Aug 02 07:05 PM