Goldman Sachs’ Jan Hatzius: Don’t Be Fooled by Inflation

This whole week, I’ve been out of the office, and of course, each data release is I didn’t get a chance to review in real time had some significant hair on it.

Case in point: Durable Goods Orders. Indeed, yesterday’s rally was (ostensibly) attributed to the surprising strength in Durables.

Only not so much.  When you consider the price rises that were included, the strength vanishes.

Goldman Sachs’ Jan Hatzius:  Durable Goods Orders: Don’t Be Fooled by Inflation

Durable goods orders beat expectations with a 1.3% month-on-month increase in July.  But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002. 

Even if we adjust for the unfavorable year-on-year comparisons that partly explain this plunge, the recent data look surprisingly similar to those seen in the runup to the 2001 recession.

Just like GDP — preliminary revisions for Q2 was released earlier today — and like retail sales, we see inadequate accounting for inflation that creates the illusion of growth.

We are a nation that is beyond denial — we are kidding ourselves. If we don’t start dealing with reality, it will be our undoing.

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  1. Jeff M. commented on Aug 28

    So what will Sir Goldilocks be crowing about tonight on his clown show?

    A.) What recession? – Goldilocks lives!
    B.) Obama’s acceptance speech lifts markets
    C.) Dems last day of convention spurs market rally in anticipation of GOP convention next week.
    D.) All of the Above.
    E.) None of the Above.

    Hhhhhmmm, let me see. I’ll go with A – the oldie but goodie – “Goldilocks Lives!”

  2. John commented on Aug 28

    Barry I’ve been wondering for awhile now, does the Fed actually believe the garbage put out by the BLS or do they realize they are doctored and act accordingly?

  3. GB commented on Aug 28

    Once the US does something like this I’m moving to the moon…

    “worried about falling stock prices? Do what the Pakistanis did: decree that prices cannot fall. In response to a 36 percent decline in the Karachi Stock Exchange this year, the board of directors of that Exchange announced that shares would not be allowed to trade below their closing level as of Wednesday. ”

  4. John Doe commented on Aug 28

    DENIAL?
    Come on BR. How could we be in denial when you all watch REALITY TV?

    sipping margeritas in Dubai!!!YES
    $$$$ Sheik

  5. John commented on Aug 28

    The US will win the Nile rowing gold medals at the next Olympics. I can feel the whole nation behind the movement. Go USA Go.

  6. John commented on Aug 28

    The US will win the Nile rowing gold medals at the next Olympics. I can feel the whole nation behind the movement. Go USA Go.

  7. Mark E Hoffer commented on Aug 28

    ” If we don’t start dealing with reality, it will be our undoing. ”

    BR,

    we’ve been kidding ourselves for, at least, 95 years (yes, I’m referring to the FedRes Act of 1913).

    the ‘undoing’ has long been ‘undone’.

    the charade of running a Real Economy on a fictive unit of account has to be the greatest grossing box-office serial of all time..

  8. JSG commented on Aug 28

    Barry-

    Is it true that when a home is foreclosed and resold it counts as 2 sales in the data? If so, home sales would be disastrous, not that they already aren’t.

  9. Pat G. commented on Aug 28

    “If we don’t start dealing with reality, it will be our undoing.”

    Until our government leads by example and cracks down on all the forms of greed that has brought us to this point, I feel we’re doomed.

  10. Stuart commented on Aug 28

    Good comments on the impact of inflation on economic figures and fictitious growth, in this case this morning’s GDP data I also read from another writer, Jesse.

    “28 AUGUST 2008

    You Can Believe the GDP Revision for the Second Quarter…

    You can believe today’s GDP revision upwards to 3.3% growth for the second quarter to the extent that you accept that inflation is running at an annual rate of 1.2%, which is what was used for the deflator to calculate the GDP revision.

    There is a profound mathematical relationship between higher GDP and the assumption of a lower rate of inflation.

    In addition to the GDP figures, there are GDP deflators, which measure the change in prices in total GDP and for each component. Though the consumer price index is a more closely watched inflation indicator, the GDP deflator is another key inflation measure. Unlike CPI, it has the advantage of not being a fixed basket of goods and services, so that changes in consumption patterns or the introduction of new goods and services will be reflected in the deflator.
    In short, the government economists have a SIGNIFICANT amount of latitude to make the GDP deflator appear to be what they wish it to be, and thereby to make real GDP growth achieve whatever growth objectives that they feel people will need to see to believe that the government is doing a good job, and that all is well.”

  11. nades commented on Aug 28

    I’ve been arguing the same thing for commerical construction. It keeps rising but its a hell of a lot less building. So in reality commerical construction is contracting.

    …………..

  12. The Big Picture commented on Aug 28

    Is BEA Measuring Growth or Inflation?

    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)….

  13. Peter commented on Aug 28

    What is to stop a virtual world existing in parallel to the real world?

    Market makers and traders etc can occupy this imaginary reality, isolated from the real world, and the two need never meet. In the parallel reality, where economically everything is just fine, the economy is booming and profits are made.

    I don’t see why the worlds should ever need to collide.

  14. Stuart commented on Aug 28

    It works. USA marketing, see our treasuries are worth buying, look at the GDP……… see, see everyone is worse than us. Motive. Headline writers took it hook, line and sinker.

  15. David commented on Aug 28

    I prefer we don’t deal in reality. That allows us short sellers to profit.

    Barry. Please cease all attempts to argue we’re in a recession. I wanna make money like I did in 2001-2002, please. Me want big bonus this year-end to spend on deflating assets. Maybe a foreclosed vacation home.

  16. tranchefoot commented on Aug 28

    “Barry-

    Is it true that when a home is foreclosed and resold it counts as 2 sales in the data? If so, home sales would be disastrous, not that they already aren’t.”

    Posted by: JSG | Aug 28, 2008 11:23:27 AM

    I would be very interested in an answer to this question as well. TIA

  17. dan k commented on Aug 28

    And Alice said, it seems we have been running an awfully long time, and have not gotten anywhere.
    And the Red Queeen said “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

    I’m glad you all can run fast, but I’m not keeping up

  18. leftback commented on Aug 28

    Not only are the past figures pumped up by inflation, but the future figures will decay more quickly now that we have passed, or are approaching peak inflation – assuming there are no more stimuli packages or expanded Fed auction facility shenanigans.

    (If you don’t believe me about inflation look at Treasuries over the last month or so. That peak oil scare was a great time to buy bonds nobody wanted.)

  19. winslow commented on Aug 28

    We’ve been lied to for so long (especially by the Republican administration)that it has now become part of our society. The religious right is a fraud; they will also lie to get what they want. Our standards are now such that as long as you get ahead and are successful, anything goes.

  20. Dave in ME commented on Aug 28

    “it will be our undoing”

    Umm, pretty sure we are already undone, no?

  21. Dave in ME commented on Aug 28

    “it will be our undoing”

    Umm, pretty sure we are already undone, no?

  22. leftback commented on Aug 28

    Barry – Some people think there will be a second stimulus package soon. I say not.

    A stimulus package would be likely to drive down the $ and reflate the price of oil and commodities. Since consumer confidence depends mainly on the price of gasoline, it seems to me unlikely that the present administration would want to do this before the election.

    What sayest thou?

  23. Maggie Knowles commented on Aug 28

    “Just like GDP — preliminary revisions for Q2 was released earlier today — and like retail sales, we see inadequate accounting for inflation that creates the illusion of growth.

    We are a nation that is beyond denial — we are kidding ourselves. If we don’t start dealing with reality, it will be our undoing.”

    We HAVE to elect Barack Obama and get rid of this corruption. It’s killing our country.

    We can change this and we have the perfect opportunity before us with this presidential election.

    (My first comment here, I read you daily, learned much, and appreciate your blog, thank you!)

  24. Thomas Shawn commented on Aug 28

    “We HAVE to elect Barack Obama and get rid of this corruption”

    All hail the 45% capital gains tax! It’ll fix everything!

  25. Winston Munn commented on Aug 28

    “We are a nation that is beyond denial — we are kidding ourselves. If we don’t start dealing with reality, it will be our undoing.”

    Barry,

    You obviously didn’t get the memo from Dick Cheney’s office: “We’re an empire, now, and when we act we create our own reality….”

    We have been considering the wrong children’s tale; this is not about Goldilocks, but rather about Alice and Wonderland and Queens of Hearts, the other sides of mirrors and, “I’m late, I’m late, for a very important date….”

  26. Maggie Knowles commented on Aug 29

    Thomas Shawn – please post your source/proof for 45% capital gains tax.

  27. anon commented on Aug 29

    If you get to keep 55% of your profit for making nothing, I think you should rejoice. If long term cap gain required 10 years to kick in, that would stop this nonesense.

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