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
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.

Market Doesn't Believe Retail Sales Report

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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As we have reported in this blog many times, the U.S. government has been blatantly manipulating its economic reports for years now. Nevertheless, the market generally believes them despite their internal inconsistency or the existence of other information that is strongly contradictory. This willingness to believe seems to have broken down today with the release of the Retail Sales Report for January. The numbers were good and way above expectations. Instead of rallying as it should have, the stock market tanked.

According to the government statisticians, retail sales rose 1% in January. The forecast among economists (who can't be trusted either) was for a drop of 0.8%. Perhaps this discrepancy was just too great for the market to buy it. The report furthermore had a big gain in apparel purchases, even though same store sales data for clothing chains showed a big decline. A number of retail industry watchers commented on this discrepancy and other anecdotal evidence that seemed to contradict the government's view. There seemed to be a consensus that the numbers would just be revised downward next month.

Looking inside the report, this is indeed what happened for December's numbers. Originally reported down 2.6% (not 2.7% as most media stories stated), the drop for December is now an even more horrendous 3.0%. The January rise of 1.0% would be from this lower number, or only up 0.6% above the number first reported. The news media always fails to point this out and this leaves a gaping loophole for creating good news where none exists. The real numbers, which are much worse, only come out a month or two later and the media pays little attention to them. There have been cases in other government reports where the revisions downward were so significant that even though there was a 'rise' in the numbers for the current month, the total was actually lower than the first number reported the month before. So even though the numbers are actually declining, they were reported as going up. This does not appear to be the case for the January Retail Report however. The good numbers seem to rely more on the falsification of the figures.

There was one another oddity in this Retail Sales Report as well and that is how it was covered by the news services. Articles were unusually short and details limited - this immediately made me suspicious of course. I had to search to find more extensive coverage (filled with negative commentary from everyone interviewed) and this has not happened before. It will be interesting to see if the new scepticism on the market's part spreads to the even more absurd inflation, jobs, and GDP reports. If it does, when the economic news actually does become better, no one will believe it.

NEXT: Deepening Global Recession Means More Inflation

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.