Friday, August 26, 2011

Guide to Interpreting U.S. GDP Figures


The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

An update for second quarter GDP figures were released today and growth was revised downward to 1.0% from the initial reading of 1.3%. There will be another revision next month and then further revisions each year in late July or early August. Expect the numbers to get worse as time goes on.

Media attention is not equally distributed to all the versions of the same GDP report. The most attention goes to the first release called the Advance Report. These have tended to be highly optimistic since the Credit Crisis began. The Second and Third Reports that follow (also known as the Preliminary and Final Reports) get slightly less attention, although these are almost always within the same ballpark. The big revisions come in the yearly updates in July and while these can be devastatingly bad, little attention is paid to them by the mainstream media. Nor is the information provided in them used by the mainstream media to interpret current data. The primary reason for this is that the mainstream media rarely interprets government statistics at all no matter how absurd and ridiculous they are. Instead, they mindlessly repeat them in a parrot-like fashion. The public then thinks it's getting real news when it isn't.

On July 29, 2011, the BEA (Bureau of Economic Analysis) revised the GDP figures back to 2006 and stated that GDP growth in Q1 2011 had only been 0.4% instead of 1.9%. There was some comment attached to this report about how seasonal adjustments had inaccurately overstated the numbers. It would be logical to think that such overstatements would be happening in Q2 as well and that these will not be corrected by the BEA until the revision in July 2012. Looking at changes made to the GDP numbers in the last few years certainly provides more than enough reason to believe that the BEA provides the best news possible when the media pays the most attention and the worst news when no one is looking.

The history of the GDP for Q4 2008, the quarter when the Credit Crisis was at its worse, provides a good example of how the government reports GDP. The first report out was a reading of -4.0% -- a bad enough reading, but much better than what was really taking place. After many revisions downward, the BEA this July said the GDP had actually changed by -8.9%. This is an absolute error of almost 5.0%. If the BEA states quarterly growth is +3.0%, you may wish to ponder if it was really
-2.0% instead, but you won't be hearing about the difference until years later. One is normal healthy growth and the other indicates a recession.

The year over year GDP figures can have even bigger errors. The difference from Q4 2007 and Q4 2008 originally indicated 3.3% GDP growth (during the worst recession since the Great Depression, this pigs-can-fly number went unquestioned by the media), but by the July 2011 revision a GDP decline of 3.3% was admitted. This is more than a 6.0% absolute difference. You might want to consider subtracting 6% from any year over year GDP number that the government provides.

The GDP figures produced by the BEA can be highly unreliable and yet the mainstream media doesn't discuss this, nor does it warn investors about it in its reporting. When hearing the news about GDP growth being a passable 2% to 3%, you should assume it might barely be positive or even somewhat negative. For reports like the recent ones that indicate growth of 1% or less, you should assume the economy is noticeably contracting. The BEA will not admit these discrepancies until well into the future however.  You can also assume other statistical manipulations being used to overstate GDP won't be admitted at all.
Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.