Q2 GDP Is Mostly Inflation

by: Barry Ritholtz

We noted earlier today that the Bureau of Economic Analysis reported revised Q2 GDP data at a better-than-expected annualized 3.3%.

As discussed in the comments, 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.

Back to the US 2008 Q2 data: Here lies the gravamen of the issue. Part of the reason the GDP number looked so good was because the GDP price index for the second quarter was marked at just 1.2. In other words, BEA subtracted from nominal GDP 1.2% in order to produce their version of "real" (inflation-adjusted) GDP.

Mike Panzner sends along the chart below, along with these comments:

"Call me a skeptic, but based on the accompanying graph of the GDP inflation figure and headline CPI (which most people already believe is lower than reality), there seems to be something of a disconnect between the two (which would imply, of course, that U.S. economic growth is a lot lower than reported)."

That is precisely the issue at hand. The GDP Price index is even lower than the already laughable CPI inflation index.

Click for ginormous chartGdppricecpi

Chart courtesy of Michael Panzner

Take growth. remove inflation ex inflation. What's left? I cannot even make up a term for the Frankesteinian mess that results.

But it sure as hell ain't Real GDP . . .


Goldman Sachs’ Jan Hatzius: Don’t Be Fooled by Inflation (August 2008)

Q2 GDP = 3.3% (kinda)  (August 2008)