King Report: GDP Follies

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The GDP report last Friday evinces the folly of US government economic statistics and Wall Street consensus analysis.

Most of the Street heralded the 1% decline in Q2 GDP because it was 0.5 better than consensus – even though the US government admitted in the release that its GDP estimates over the past several years were consistently wrong! So why should the latest report be any more accurate?!?!

We feel compelled to address the scheme of ‘past month lower revisions producing better than expected m/m or q/q results’ even though the aggregate metric is worse than expected. We have incessantly noted and commented on this scam but most of the trading & investing universe elides it.

We will again utilize basic math to illustrate the scam. If Q4 08 GDP was 100 units, and Q1 09 was reported at -5.5% and Q2 09 GDP was expected to be -1.5%, the expectation was for GDP of 100 units minus 5.5% or 94.5 units, minus 1.5% or 93.08 units.

With the revision of Q1 09 GDP to -6.4% the Q1 GDP units become 100 minus 6.4% or 93.6 units. So Q2 is minus 1% or 92.664. Ergo aggregate GDP was worse than expected!!!!

As we warned, lower imports, a sign of economic weakness, contributed a net 1.4% to GDP.

Once again beancounters ‘fooled’ with inflation to produce higher GDP than warranted.

John Williams: The relatively narrower quarterly contraction in the second quarter reflected the impact of greater weakness being thrown back into the first quarter, in revision, and the use of artificially reduced inflation. The implicit price deflator for the second quarter was 0.2% versus a revised 1.9% (was 2.8%) in the first quarter.

Last week we complained that despite records in fiscal stimulus, Fed largesse, nationalization and rigging of markets the best that can be said is the pace of economic decline is slowing.

Despite a 10.9% surge in federal government spending and virtually no inflation adjustment all that beancounters could fabricate (June data is still incomplete) is a 1% ‘official’ decline in GDP.

David Rosenberg echoes our observation: Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms?…In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!”

And, it is not just labour income that is still in deflation mode. Practically all forms of income are deflating from a year ago — interest income is down 4.5%, dividend income is down 23.0% and proprietary income is down 8.0%. The only income that is really going up is the income from Uncle Sam, which is up more than 10.0% and we have reached a point where a record of nearly one-fifth of personal income is being accounted for by paychecks out of Washington…

Even with decades of understated inflation and overstated of GDP, the current economic contraction is the worse since the Great Depression.

The GDP report also shatters the notion that the stock market is omniscient and demonstrates that Wall Street analysis could not discern the worst economic and financial collapse since the Great Recession.

While the US was in recession since at least Q4 2007, most of the Street did not forecast recession. Stocks, most notably the DJTA, missed the worst economic downturn since the Great Depression. As we keep averring, record funny money, lax regulation and smiley-faced fascism has transformed the stock market from a gauge of economic activity into a generator of economic activity.