Wednesday, October 31, 2007

I'm Not the Only One Calling Bulls^#$ on the GDP Inflation Number

It's good to know I'm not alone in my questioning the GDP deflator number.

From the Big Picture:

Price Indexes for Gross Domestic Product was an astounding low 0.8% (Table 4). In other words, this report benefited as much from higher inflation as it did from true growth.

I obviously take issue with that (as Crude Oil crosses $94 for the first time).

To highlight the impact that this 0.8% price gain had on the reported REAL GDP: that 0.8% gain matches a level last seen in 1998; prior to that, the previous deflator gain of .8% was n 1963.

Peter Boockvaar of Miller Tabak observes that "with the dramatic upturn in energy prices and other commodities, the decline in the Price Deflator is obviously unsustainable. The consensus today for Nominal GDP was 5.1% and came in today at 4.7%, thus weaker than expected. Q3 GDP was fine , but not as good as the headline report reads."

The average of the price index since Q1 2004 to Q2007 was 2.98, ranging froma low of 1.7% to a high of 4.2%. Thus, if the deflator matched consensus, it would have generated a GDP of 1.9%; if it was at its recent 3 year average of 2.98%, GDP would be ~1%.

A poster in the comments pointed me to this article from Marketwatch:

As odd as it sounds, the government reported that inflation was at a four-decade low in the third quarter, primarily because import oil prices rose so much.

If you don't understand that, welcome to the confusing world of national income accounting, where up sometimes is down, and where sometimes one plus one can equal zero.

The simple explantion:

Because of the way the government counts and reports the numbers, real-life inflation was understated and growth was overstated.

The economy didn't really grow 3.9%, and inflation really wasn't 0.8%. The numbers aren't as good as they look.

Read the whole thing.