Strange things are afoot with GDP

Naaf741_economy06292005200926I do not want to become a "nattering nabob of negativity," but I cannot shake the idea that yesterday’s GDP numbers had a certain odor about them.

Maybe I’m just an economic curmudgeon.

Perhaps I am too "reality-based" in my perspective.

I simply cannot compromise my belief in hard data (versus hedonics and seasonal adjustments and/or revisions).

Nor can I manage the suspension of disbelief so common amongst the economic cheerleading crowd, both in the private sector, at the Fed, and amongst the elected and appointed government officials.

Look, I understand that a certain degree of economic positivity is required — for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter. I have no desire to cross over to the tinfoil hat wearing fraternity. I accept the necessity of some measure of ‘happy’ bias in the government models.

But at what point do we cross the line from maintaining a healthy optimistic outlook to cynically manipulating data in boldfaced contradiction of reality?

Unfortunately, I think that line was crossed in yesterday’s revised GDP data:

GDP Components:   
Q1 Final (Est 3)    Q1 Prelm(est 2)   Q1 Adv(est 1)]

Real GDP                  
+3.8%                +3.5%                   +3.1%      

Here’s the thing:  Within GDP data, the revision of the Residential Housing is simply too hard to believe: This is data that’s widely available from the NAR amongst others. To get there, you need a significant DROP in home prices. That’s right, a drop in home prices. The revision from +8.8% to +11.5% is simply enormous. I cannot say for sure that its unprecedented — but I cannot recall it being this huge in recent memory.

I am not the only one: The (subscription only) MNSI specifically observed:

The Commerce Department said exports and
investment in residential structures were revised higher in Q1 . . .The structures revision
was due to downward revision to the one-family house price index which resulted
in more real sales and less inflation
an almost unbelievable result given
that the housing market is on fire with home prices posting double-digit
appreciation on the year in some areas.
(emphasis added)

Yesterday’s upwardly revised GDP data is believable only if you accepty the premise that HOME PRICES WENT DOWN IN Q1 2005.

Otherwise, the data was gamed.

Follow the bouncing ball:  The revisions to GDP inflation accounted for virtually all the net positive
revisions to growth

How? The GDP implicit price deflator. For the quarter, it was was revised downward from 3.16% to 2.89% (a drop of 0.27%). That accomplishes a neat little trick: By (artificially) reducing the rate of inflation, the BEA spikes real GDP growth by the same amount, and total GDP growth revised upward from 3.48% to 3.76% (rounded up to 3.8%), an increase of 0.28%.

The deflator was revised downward from an annualized 3.3% to 1.1%, an astonishing drop of 2.2%, and real housing growth revised from 8.8% to 11.5%, an incease of 2.7%. 

Yet year-over-year housing inflation in the GDP is at just 5.2%. Cranking that number up to reality raises inflation, lowers GDP, and spoils everyone’s party.

Forget taking the punchbowl away, this crowd is spiking it with LSD.

Its not like I do not admit when I am wrong. Hell, I expect to be wrong.

But this is beyond the pale.

GDP numbers, IMHO, have now entered the realm of Santa Claus, the Easter Bunny, and honest politicians. They are all fictional characters.

(I hope to have some more on this later)


NAR Data on Home Sales Q1$FILE/REL0505EHS.XLS

First-Quarter GDP Is Revised Upward on Housing Surge
DOW JONES NEWSWIRES, June 30, 2005; Page A2,,SB112004797007972800,00.html

ANALYSIS: US Q1 GDP Rev +3.8%: Prices Dn, Expts & Res Inv
By Joseph Plocek

Market News Service International
Wednesday, June 29, 2005 8:31:18 AM (GMT-04:00)

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What's been said:

Discussions found on the web:
  1. Dave commented on Jun 30

    More fuel on the GDP fire:

    “Date: Wed Jun 29 2005 11:24
    trotsky (Big Bob@GDP) ID#248269:
    Copyright © 2002 trotsky/Kitco Inc. All rights reserved
    US GDP is overstated by approximately 3% , mostly via hedonic indexing.
    the numbers in some subsectors are so distorted as to defy belief. for instance, between 2000 and 2003, a 13% FALL in nominal IT spending was magically transformed into a 58% INCREASE for the GDP account. this was incidentally the MAJOR component of the reported ‘GDP growth’ during the period. it is an incredible Potemkin village…dollars that no-one ever spent or received come to life with the help of doctored statistics.”

  2. The Stalwart commented on Jun 30

    GDP Data Being Manipulated

    The Big Picture: Strange things are afoot with GDPWhen the GDP number came out at 3.8% yesterday, I told my colleague I suspected there would be some revelation to suggest that the number was misleading, or unsustainable in some way.

  3. John East commented on Jun 30

    You said, “I understand that a certain degree of economic positivity is required — for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter.”
    Hey, go easy on us goldbugs. Your point may have been valid during the long gold bear market, but many of us have been doing very nicely thank you over the last few years.
    When mainstream commentators (if I may be excused calling you this) start to point out the data is fiddled then maybe it’s time for you to start stocking up on canned food and shot gun cartridges?

    Yours was an interesting post on an interesting blog I’ve just discovered. Keep up the good work.

  4. rob commented on Jun 30

    this is why, in spite of the shrill protestations of Maria Bartaromo, the market doesn’t trade off the data anymore.

  5. fester commented on Jun 30

    Dumb question: Is the housing component of the GDP deflator based on the same system of owner equivilant rent as the CPI-U? For if it is, I could plausibly believe that the housing prices went down as rent prices are stuck in neutral/decreasing right now.

  6. edje commented on Jun 30

    So who or what is behind the distortion?

    A higher GDP # is cover for the Fed’s rate hikes — look for them to continue raising.

  7. Myke commented on Jun 30

    The end determines the means.

    Did you know Grand Canyon was created 4,500 years ago?

    “The deeper you dig, the muddier it gets.” Carl Jung

  8. milt commented on Jun 30

    Can any country’s GDP data be believed? Not that I’m a gold bug, but it certainly is advantagous to cook the books when you have a fiat currency. This strikes me as a world wide strategy. How much home cooking is going on in European Union countries? I recall Greece cooking the books to get into the European Union, but there is no punishment.

  9. fred krueger commented on Jun 30

    I couldnt agree more. The whole concept of the GDP deflator with its hedonic adjustments ect.. is preposterous. Its amazing to me that nobody in the mainstream media will even question it. Sort of our foreign policy in that regard…

  10. not so happy commented on Jun 30

    Look, I understand that a certain degree of economic positivity is required — for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter. I have no desire to cross over to the tinfoil hat wearing fraternity. I accept the necessity of some measure of ‘happy’ bias in the government models.

    The happy happy happy model is one of the best builders of tinfili hat reality. We have it happening in Iraq, we have iit happening in the economy. all is good, so good better than ever and any concern is liberal treason designed to subvert the good of the nation, indeed that concern is the sole cause of any problem.

    People watch this “reality” becoming more and more extreme, they and most fall into it to a degree, people are fall inmto group think, are intimidated by the bullying; then finally when it tatters the authority of the “establishment” is called into question. And much of the populace has been tricked or coerced into views that fall apart, as they are revealed as fools there are reactions and resentments, the complex intense psychological games are extensive. The ploy of irrationality and imaginary realities is not a harmless game, it undermines society.

    If it fails it breaks faith in the system, it destroys trust. To succeed it requires movement towards tyranny, the never ending victories communist societies claimed are an example.

  11. Tim commented on Jun 30

    As I understand it, they have to have GDP increases bigger than Europe to attract money or it’s game over. So finageled numbers shouldn’t be a surprise.

  12. Danielle commented on Jul 1

    If you look at GDP growth since the 40s, it has averaged around 3-3.5%. It hasn’t happened very often that it stayed over 3-3.5% for more than a few quarters, hence it seems logical to expect a few quarters of below 3% to present themselves in the near future. Is anybody out there forecasting this?

    On the other hand, if you look at GDP components, you can see that there are many ways to boost GDP. You can stimulate consumer spending which is what we have seen. I guess you could try to get net exports back to 0 but in the short term this should bring down corporate profits, consumer spending and investments. The best way to stimulate GDP growth in the near future seems to lie in government spending. That’s what Japan did and intuitively, I think the US will be stuck doing the same (pensions, health care…).

    And if GDP growth comes from government spending how productive will the American economy become?

    What worries me more that slower growth in the US is what the impact will be on global capital markets. Credit spreads have come down in corporates and high risk countries as investors have been chasing yield; if the global economy slows, won’t a huge mass of money make its way back into safer economies such as the US? And if this happens, doesn’t it mean lower treasury yields down the road?

  13. Danielle commented on Jul 1

    Forgot to mention that I read somewhere that Turkey issued some debt at 4.95%!!! TURKEY for crying out loud!

  14. Mover Mike commented on Jul 2

    Around the Economic Blogosphere

    Checking around the Blogosphere to see what bloggers are going on about:

    Angry Bear has an excellent post about the FOMC raising interest rates and a chart showing “real” Fede…

  15. The Nattering Naybob commented on Jul 7


    Welcome to the club, we’ve been waiting for you.

    The Nattering One

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