GDP Yet Another Misleading Indicator

I was out of pocket all day yesterday, and didn’t get a chance to address the GDP data. At 3.4%, it came in slightly below the consensus of 3.5%.

There were two significant factors: A slight increase in wages, and big decrease in inventory. We’ll see the July NFP report this Friday (more on this below) — but lets address inventories, via Barron’s Alan Abelson:

"The gleeful assumption by the sunshine crew that the inventory drop in the GDP report augurs big growth in output in the second half is more than slightly misplaced. The reason simply is that a huge chunk of the inventory reduction was the result of auto companies staging fire sales to clear their dealers’ lots, an action certain to take a sizable bite out of future sales."

No big surprise there. Giving away cars at cost is hardly indicia of a red hot economy. But what about Industrial output? Isn’t that a significant factor?

In a word, no. More than half of the uptick in output was Utilities cranking out more juice thanks to the heat wave. And a sizable chunk of the rest was (you guessed it) these same auto makers producing more cars to be given away at cost. GM’s July numbers showed a 46% sequential monthly increase.

Where I disagree with much of the bear camp is where they go anti-Candide — where every data point is the wosrt of all possible worlds. Instead of focusing on the underlying weakness below the headline numbers, investors of the Ursine variety are calling the data proof that the Fed has to keep raising rates. To me, that’s an after the fact rationalization — they were gonna keep raising anyway.   

As to the Jobs situation, the slack in the Labor market, as Sir Alan likes to call it, continues to get even slacker:

"Moreover, something’s definitely askew when the stock market starts to go bananas while the job market remains depressingly limp. As Challenger, Gray & Christmas, the placement outfit, observe, layoffs typically ease in the summer months — but not this summer. Instead, it has produced a bitter harvest of job cuts. In May and June alone, layoffs totaled nearly 200,000. And more recent weeks have brought no respite."

And that’s just layoffs.

As to NFP, we have yet to see a single good number that was not been the result of some hedonic adjustment or another (Prime suspecty: The Birth/Death adjustment, added in 2001). Between the inherent upside bias built into the BLS models, and the other  assorted massages, its  astonishing the data is this bad. And that’s before we back the least significant aspect of NFP — governement hiring.

Bottom lineTorture the data long enough, and it will confess to whatever you want it to.


Poor Darth Vadar
Barron’s, Monday, August 1, 2005

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  1. Josh commented on Jul 30

    I guess we will find out Friday whether or not the BLS birth/death adjustment is providing the bulk of so-called job growth. While April through June historically have strong upward revisions under the birth/death model, July is historically a strong downward revision. I dont know (or care) why; it just has been in years past.

  2. James Hamilton commented on Jul 30

    Good points, Barry. Can’t follow the Abelson link without a subscription. Do you know where he gets the data for the claim that a huge chunk of the inventories comes from autos?

  3. anne commented on Jul 30

    Barry, please know and let your designer know how attractive we all find your blig. What an excellent design for simplicity, ease, and attraction.

  4. anne commented on Jul 30

    Of course your “blog” is also nice :) I ever need a spell check as students groan.

  5. Barry Ritholtz commented on Jul 30

    Hey Joelle, you catch that?

    (And we thought the links embedded in the graphics at top were too subtle)

  6. dude commented on Aug 1

    I love the reference to “the sunshine crew”. That describes it perfectly. Every time I see John Snow talking, I can’t help but just laugh at the guy’s blatant propaganda. No matter what is going on in the economy that guy seems to be whistling dixie out of his backside about how great the Bush policies are. Watching him “testify” to congress (if you can call it that) is truly entertaining. …a real dog and pony show.

  7. Econbrowser commented on Aug 1

    Further thoughts about the latest economic statistics

    I’ve had a little more time to ponder the meaning of some of the economic data released last week, and here’s what I’ve come up with.

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