Pulp Fiction: The Latest GDP Revisions

Yesterday the Bureau of Economic Analysis (BEA) revised its 2Q08 GDP growth to an annualized rate of 3.3%, up from 2.7%. It’s a shame this data had to be revealed on August 28, a date not associated with humorous pranks; had it come out on April 1st investors would have a much better clue that the BEA is joking.

There are several problems with the BEA’s data. But the most glaring of them pertains to its inflationary measures. According to the BEA, the GPD price index — its primary measure of inflation — was 1.2% for 2Q08.

I’ve thought long and hard about what demographic possibly experiences inflation of 1.2%. The closest group I could come up with was the Amish — who don’t use electricity or drive cars and therefore are immune to energy prices — though their status as “food consumers” hurt even this hypothesis; food is second only to energy in terms of price hikes.

Alas, no one in the US is experiencing inflation of 1.2%. And its frightening to think that the “official” inflation data from the US government is even less accurate than the phony Consumer Price Index (CPI) numbers used by the Federal Reserve—CPI is around 5%.

As we’ve mentioned on these pages several times before, the Bureau of Labor Statistics has altered its measure of inflation several times in the last 30 years. The first major change was put forth by Michael Boskin, Chief Economist during the first Bush Administration, and Alan Greenspan, former Chairman of the Federal Reserve.

John Williams of www.Shadowstats.com describes this beautifully:

Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods ... The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

…Shortly after Clinton took control of the White House, however, attitudes changed. The BLS … [changed] the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

The second significant change involved “hedonic” adjustments or adjustments made based on the assumption that new items were more efficient and therefore worth “more.” Williams uses an example in which one could claim that a washing machine doesn’t cost 20% more because the user gets 20% more pleasure out of the fact that it is more efficient or powerful than an old washing machine.

 

With all of these changes implemented, the Federal Reserve’s measure of CPI was able to greatly understate the rate of inflation in the US. Keep all of this in mind when you consider that the BEA's current measure of inflation is even lower than the Fed’s highly manipulated CPI!

So what does all of this have to do with GDP growth?

Barry Ritholtz of The Big Picture explains:

…the measure of Inflation is crucial to getting an accurate read on GDP (or Durable Goods). Say you live in a country that produced $100X worth of widgets in Year 1. In Year 2, it produced $110X worth of widgets. What was your GDP gains? 10% ? 0% ? Or something in between? If your inflation data is ~2%, then you can conclude that the bulk if those widget sales was growth.

So, when you consider that the BLS claims that the US GDP grew at an annualized rate of 3.3% in 2Q08 because inflation was only 1.2%, you begin to realize how manipulated this data is. If the BLS used “real” rates of inflation — roughly 10% — it would be clear the US GDP shrank in 2Q08.

 

There appears to be no end to the tactics employed to massage official US economic data. However, it doesn’t matter what kind of lipstick you put on a pig … it’s still a pig. And the US economy is clearly in a recession. It started with the housing market, spread to the credit markets, and will soon be spreading to consumer spending.

I expect 3Q08 and 4Q08 results for retailers will be abysmal. Sales for automobiles and other large expenditures have already plummeted. Retail and smaller consumer discretionary items are next. Might be worth establishing a few shorts in the sector.

Comments

[Chris B:]

Might there be a coincidence in that this is occurring during an election year during which the economy is the main issue? Maybe they will succeed in convincing us that this is just a "mental" recession by feeding us official numbers.

Unfortunately, I cannot afford to hire my own economic analysis firm to discover the truth, but I am sure some big investors have. Of course, private economists can't reveal their data or they are giving away their work for free. Still, I would love to see a Warren Buffet or George Soros announce their findings on the issue.

2008 Aug 29 12:23 PM

[milkchaser:]

I think 1.2% inflation is closer to reality than 10%.

2008 Aug 30 08:15 AM

[mouse:]

milkchaser, what planet do you live on?

2008 Aug 30 08:25 AM

[notsosmart:]

considering the shrinkage of weights & measures in products & increase of price the inflation rate of the 5 basic daily needs is app.15-16%.add to this mess that corps. are beginning to cut or cut out contributions to 401k or other plans & you can see how great the middle class is doing.election choice-really none.keep swilling(belgium) beer & filling the stadiums,dumb-dumbers.... the time you wake up it may be too late.it may be too late now. sad.

2008 Aug 30 09:17 AM

[Boubou:]

Along comes the latest round of lies and distortions and we say
"what agenda is served by this new crock?'
There are a few trying to tell us how things really are but they don't get much exposure - the mass media see to that.

2008 Aug 30 09:38 AM

[David Lentz:]

..."though their status as “food consumers” hurt even this hypothesis" ...

news flash -- the Amish grow their own food, and use tools to do so that are much less dependent on energy prices. Thus the Amish are clearly the demographic grouping that the BEA was targeting.

2008 Aug 30 10:48 AM

[ain't no fo...:]

Author's quote:

"And the US economy is clearly in a recession. It started with the housing market, spread to the credit markets, and will soon be spreading to consumer spending."

EXCLUDING sales at gas stations and possibly grocery stores, I would submit that with the triple impact of the housing meltdown, credit meltdown and oil "meltup" (ANY ONE of which would be expected to negatively impact retail sales numbers, much less all THREE occurring so spectacularly and simultaneously in a perfect storm so far beyond anything we have experienced in several generations) no rational person on this planet could believe that retail sales are flat as the so-called statistics SEEM to suggest.

I would further suggest that the same lies are being foisted on the public, by the same liars, about sales figures as are already being done on GDP, CPI and virtually every other manipulated metric of this nation's commerce, by a government and business community that is DESPERATE to whistle by the graveyard in the (hopefully) vain hope that we the people will not figure it out.

So, people, HAVE we figured it out yet?

We aren't likely to get many more chances if these cretins have their way... tick tick tick

2008 Aug 30 02:34 PM

[ed auerbach:]

So what? Unemployment is under 6%. Housing at a median of $212,000 is now affordable for 1st time buyers and there is $3.6 trillion in money markets with $1.4 trillion in 401s and lets be honest, most homeowners still have lots of real equity in their homes. We're rich!!, working and last I read India is still growing at 7.9% and China at 11% (even if stocks are down 55%--might be a buying moment here). As long as we work and supply BRIC we're going to be just fine and whether we're in a recession or a turndown we will soon turn the corner and start the next bull cycle. There are tons of quality stocks with decent to great growth prospects selling at pe's under 10. I love bears, specially of the perma vartity. They seem to have forgotten the old market axiom: "bull markets climb a wall of worry". Keep worrying brothers. I'm doing a little buying.

2008 Aug 30 05:34 PM

[cynic69:]

ed auerbach - Never in the history of the world have energy prices been this high with respect to real wages. There are 60 major oil fields in the world. 56 are in serious decline. Today there are 1.9 million barrels of oil in the inventory and Gustav is about close down much of the pumping and refining capacity of the US. Ben and Henry cannot manipulate the price of oil or the pervasive affect it has on the economy. As you push that "buy" button I would say a little prayer if I were you.

2008 Aug 30 08:51 PM

[Takayama:]

The bulls have been shot in the arm, less talk from them nowadays. But the worse has yet to manifest its shadow. Monitor the crime rate, as an economic indicator.

2008 Aug 30 11:16 PM

[fxtrader07:]

just the latest in a whole series of data manipulation and outright statistical lies by the govt and its agencies. the agenda is simple: If the data are bad, make them look good, adjusting and massaging them until the pig looks like a beuty queen. If you can't do it, then stop publishing that data alltogether - e.g. the M3-figures which the fed stopped publishing right before the recent crisis hit. Go figure, they do know their timing - don't they?

2008 Sep 01 10:07 AM