GDP - Report is Bad, Reality Worse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. government released the fourth quarter GDP figures today. The report showed a 3.8% annualized decline in the economy, which would be the worst showing in 26 years if it were true. It is not. This report continues the unbroken chain of fantasy that has emanated from the U.S. commerce department recently (the Inflation and Employment reports are the U.S. government's other great works of fiction). Even the internal figures in the GDP report show that the economy is in much worse shape than the top line number indicates. The lie was so outrageous this time that even the ever credulous mass media included statements in its reporting about the likelihood of the number being revised downward when 'new' data becomes available (or when the embarrassment of so many people laughing at the report becomes so great that the government is forced to publish a somewhat more realistic number - don't expect the truth under any circumstances however).

The first place to look for manipulation in every GDP report is in the inflation figure used to adjust the nominal figure to get the reported or 'real' number (growth caused by inflation is not actual growth and that is why this adjustment has to be made, this adjustment is the GDP deflator). According to the U.S. government, prices FELL by 5.5% in the U.S. in the fourth quarter of 2008. The government also claimed that the prices rose only 1.2% in the second quarter of 2008 (a time when gas prices were heading above $4.00 a gallon, food prices were soaring, and the government's own PPI report indicated inflation of around 13%, yet somehow the GDP statiticians couldn't find any inflation that quarter). If a more realistic inflation figure had been used, GDP for the fourth quarter may have declined 8% or 9% - a depression level drop.

The bigger decline in GDP is supported by looking at the individual components of business and consumer spending. Spending by businesses on equipment and software fell at a whopping 27.8% annualized pace, the most since 1958. Hard hit homebuilders slashed spending by 23.6%, even deeper than the 16% annualized cut in the prior three months. While internal U.S. economic conditions were bad, there was no relief from exports either. U.S. exports, whose alledged growth earlier in 2008 helped produce better GDP figures, turned negative. Exports plunged at a rate of 19.7%, the most since the deep recession of 1974. Despite these horrendous conditions, the GDP report also claimed businesses increased inventories substantially (which adds to current GDP growth, but would subtract from it in the future). just taking out this supposed inventory increase, U.S. GDP would have contracted by 5.1% instead of 3.8% last quarter.

The consumer component of the GDP equation didn't look any better either. U.S. consumers cut back spending on durable goods (items expected to last a year or more such as cars, appliances, furniture, etc) by a huge 22.4%, the largest amount since 1987. Spending on non-durables (which includes most necessities such as food and clothing) fell by 7.1%. A decline of that magnitude has not been seen since 1950. Despite these very large declines, the GDP report stated that consumer spending fell by only 3.5% in total (on the surface it doesn't seem possible that you could get this number from the component parts).

Despite the Credit Crisis which had ravaged the economy in 2008, the U.S. government claims that the American economy grew (yes, grew) by 1.3% in 2008. This is down from 2.0% growth in 2007. Anyone who believes this number, probably also thinks that pigs can fly. Obviously, the Commerce Department in Washington is trying to statistically prove that this can happen, although it doesn't seem to be possible anywhere else in the country.

NEXT: Negative Outlook for the Market from January Barometer

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.

Housing Market Collapses, but the Statistics Hold Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The August housing sales figures released in September 2007 indicated that housing sales had fallen off a cliff in most of the areas of the U.S. that had been at the center of irresponsible mortgage lending. Los Angeles county California lead the way with a 50% decline in houses sales from the previous year. Orlando, Florida and Phoenix, Arizona were not far behind with a 40% drop. House sales in Las Vegas, Nevada were 37% lower than a year before. The collapse in the U.S. housing market would be led by these four housing bubble states: Arizona, California, Florida and Nevada plus two others: Michigan and Ohio, which were suffering economic hardship from declines in U.S. manufacturing.

One of the most fundamental tenants of economics is that price is determined by supply and demand. When demand drops or supply rises, prices should fall. When demand drops a lot, prices usually fall a lot. While there were anecdotal reports of housing prices falling 50% or more at bank auctions in various parts of the country, the overall statistics indicated only modest drops in housing prices in most communities, and even small increases in others. How was this possible, assuming there was no fraudulent manipulation of the numbers (something that should always be considered when two and two doesn't add up to four)? As with many of the U.S. government reports, statistical sleight of hand by the number crunchers was at work .

When housing prices were being compared year over year, there were in reality two different markets being measured. In other words, the comparison was being made between apples and oranges and was therefore effectively meaningless. When housing sales fall dramatically, they don't fall evenly across the economic spectrum. People who buy more expensive homes are more likely to be able to get a mortgage and the high-end of the housing market holds up. People at the lower end get shut out and sales for cheaper homes fall much more than those of expensive homes. The most recent housing market statistics will have a lot more high-priced homes in them proportionately than the previous years statistics and this skews the average and median prices up. It is in fact easy to come up with examples where every house price in a market falls by a significant amount and yet the average and median house price goes up! This was exactly what was happening in the summer and fall of 2007. While the plummeting housing sales numbers were accurate, the officially reported prices in no way reflected actual pricing trends in the market.

Next: Bubble, Bubble, Toil and Trouble

Daryl Montgomery,
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21