At the risk of sounding shrill, I am compelled to point out the quantum bogosity of this 3.9% GDP number: It is highly dependent upon a rather suspect reading of Price Increases/Indexes for Gross Domestic Product: The Price Deflator rose a much less than expected .8% vs expectations of 2%.
The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), exports, federal government spending, equipment and software, nonresidential structures, private inventory investment, and state and local government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The slight acceleration in real GDP growth in the third quarter primarily reflected accelerations in PCE and in exports that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures.
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%.
I suspect that a more accurate GDP reading would be somewhere in between . .
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GDP Price Shenanigans!
Chart courtesy of Bloomberg
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Sources:
GROSS DOMESTIC PRODUCT: THIRD QUARTER 2007 (ADVANCE)
WEDNESDAY, OCTOBER 31, 2007
http://www.bea.gov/newsreleases/national/gdp/2007/pdf/gdp307a.pdf
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Economists React: GDP Growth ‘Not Built to Last’
October 31, 2007, 10:16 am
http://blogs.wsj.com/economics/2007/10/31/economists-react-gdp-growth-not-built-to-last/
it’s becoming more apparent to me that headline numbers in any announcement are to a large degree disingenuous…
Who is driving this misinformation?
Has the reporting agency been subverted to provide happy talk?
“I Call ‘Shenanigans’ on GDP!”
That’s one word for it.
“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%. I suspect that a more accurate GDP reading would be somewhere in between . . .”
Subtract all the off-budget military spending in Iraq, Afghanistan, and for the privateers, and the GDP is negative.
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1. The gov’t figures are all wrong and getting wrong-er
2. Under-reported inflation = higher GDP, so a high GDP print should not surprise anyone and should not lead anyone to believe that this will lead Fed to raise rates (they would not react to the high GDP since they actually cause it thru their inflation)
3. The tale of two economies, real economy and financial economy. The financial economy is in trouble so they will try to “save” it and they will keep cutting.
4. Based upon what Cheney recently said about currencies finding their market value, yadda, yadda (not really reported in the press BTW) I would look for USD to head somewhere near .72 in the near term.
5. Jimmy Rogers is looking smarter and smarter.
Take your point and we’ll have to see how the revisions come thru, especially a deflator change but…let’s grind some data (having spent too much time on it this a.m.).
First off Real GDP was up $294B YoY, or 2.6% which is actually pretty good though nothing like the headlines. It’s more interesting when you dig deeper:
Delta($B) YOY%
GDP
Q1 216 1.6
Q2 213 1.9
Q3 294 2.6
PCE
Q1 277 3.2
Q2 235 2.9
Q3 241 3.0
An interesting thing to NOTE here is that Consumption is a declining contributor to GDP growth, relatively speaking :)
Worth digging into ?
VJ: Nothing is ever subtracted in GDP. It is the Gross, not Net Domestic Product. Shoveling one ton of dirt from left to right and back will add up to two tons of dirt moved.
Still, the official figure was 3.9% and that’s all that will be focused on. I look 1st at the nominal GDP to construct the understanding background before I look at the net figure. Good post as I have seen few others even discovering this point this morning.
Sorry about the formatting – one of these days… meanwhile perhaps the question (aside from deflator problems) is the % contribution of each of the major components. The entries below show YOY% contribution to the total GDP delta from Q1 to Q2 to Q3.
(remember these are % of the GDP delta and measure the relative contribution)
PCE (130, 113,84)
NonResI (20, 25, 21.5)
ResI (-47, -45, -31)
Inv (-21,-21, -13)
NetX (14, 24.7, 29.8)
Gov (16, 17.9, 18.1)
In other words the jump in GDP wasn’t based on Consumption growth, which is actually pretty scary. NonRes made a + contribution but no big change. The big impacts were very large decreases in the damage from ResI and Inventories. AND a continuing big jump in Net Exports. Gov was flat.
You could run that by your S&P sectors and make a pretty accurate judgment as to how well each might do. Will foreign economies keep growing and drive large-cap Industrials ? Oh btw there was a rather large jump in Eqp & SW while commercial RE investment made a major contribution but was flat in terms of deltas.
FWIW
Your right on with your inflation analysis. Universally, my small business owner clients/friends have seem dramatic increases in product prices they use in their businesses. As a mortgage broker, I fear that interest rates will eventually have to reflect the actual inflation reality.
make no mistake…regardless of whatever the Fed does today the market will go up. You can see the start of the front running on most L2…..the MM’s can’t seem to contain themselves and we still have over an hour to go. Free market my ass…..
Even if they raise rates…..not very likely…the market will somehow cheer that as well.
Pretty sad…..and to think some would suggest this is down to skill.
One other thing is that this wonderful GDP number totally runs counter to the declining tax receipts in many states. Don’t let an inflationary recession fool you.
Good post Barry! Keep asking the right questions.
You said: “this report benefited as much from higher inflation as it did from true growth.”
You mean “lower inflation”……
And there is an explanation for this, but it’s not easy. It turns out inflation was low because oil prices rose.
Yup, it has to do with the way import prices are treated. It makes sense mathematically, to make sure there’s no double counting.
I remember a couple years ago when the opposite happened. The price index soared, but it turns out it was because oil prices fell a lot that quarter.
Usually, you wouldn’t see this kind of impact in the GDP, because domestic prices would rise in tandem with oil prices. But in Q3, crude prices soared, but refined gasoline prices fell. Most likely, we’ll have a big payback in Q4 or Q1 when gas prices finally catch up to crude. ..
But this quarter it truly is bogus.
Am I good, or what?
Volatility and numbers that just don’t add up.
I think that since the Bush administration took office, the government’s financial reports have been, shall we say, creative. I’m especially skeptical about the reports about unemployment, GDP, and inflation–a skepticism that has been displayed on these pages. While it may have been politically expedient to put their thumbs on the scales that measure the economy, I think they’re doing it now to try and fend off a colossal market crisis. The problem with that is that the real economy is overtaking their efforts to shade it, and that their “correctives,” ahem, are becoming increasingly difficult to disguise.
Is Bernanke trying to have his cake and eat it too? Is there a recognition at the Fed that inflation is skyrocketing, but to admit it would plunge the markets and foreign investment into a black hole? Are they cooking the books to make GDP look robust so they won’t have to cave in to Wall Street again and put more momentum into the inflationary drive with yet another rate cut?
What I see here is a major financial crisis looming, with the major actors vacillating back and forth. Both the financial and government institutions seem volatile, and given the circumstances of the past few months (government reports, unwillingness to regulate, yet another derivative ratings scandal) completely untrustworthy. The problem is, there is practically nowhere you can park your money where it will be safe.
>>The problem is, there is practically nowhere you can park your money where it will be safe.
May I suggest http://www.tulving.com and a shovel purchased at your local Home Depot. Digging the hole in your back yard should only take 30 minutes, depending on how deep you want to go.
the market likes it so whats the big deal?
the market likes it so whats the big deal?
Posted by: fredS | Oct 31, 2007 1:52:01 PM
_______________________
that would make the market delusional, now wouldn’t it?
Consumer prices did rise at a slower pace in the third quarter – the CPI data for July, August, and September annualizes to 0.8 percent as well.
Oil rose in September, but this had not yet been passed through into consumer prices. There will be large energy-related price increases starting with the October inflation data.
Hard, practical assets are always a good place to park money.
Nice little gunning of the stops there
http://www.youtube.com/watch?v=Rp6-wG5LLqE
“meet the new boss………
You know the rest….
Ciao
MS
The following in quotes is posted here: http://theroxylandr.wordpress.com/
…..
“I am deeply confused by today GDP numbers. I was expecting that the masters of the universe will prepare GDP report to be a good excuse for today rate cut (or a good tool to pressure for a cut, because Feds do not participate in statistical exercises).
Why did they put the chain deflator at 0.8%??? To say that inflation is over and we can safely cut? But the games with decreasing chain deflator made GDP growth at 3.9% rate, definitely not a good number for a cut. It will be revised down and inflation revised up, later on.
The only possible answer I see is that the numbers were not cooked and we do have a chain deflator at 0.8%.” …..
“The last time the chain deflator was at 1% it was in 1998 (green line), it never happened even during the deflationary scare of the last recession. We just fell off the cliff straight to the off-the-chart record, below LTCM and Asian Currency crisis deflation scare. The last time the chain deflator was below 1% it was in 1954, we’ve just made a 53-year record.”…..
“That means all the pricing power is quickly evaporating and while there is a lot of production in the pipeline the final consumption has to be showed in by the lower prices.
We got a flat tire while driving in the left line on the highway, at full speed. I think Feds must cut today but it won’t help”
……….
All the discussion here is about if this data is phony. What if it is TRUE?
Rgds
Vernon Bush
cm,
“Nothing is ever subtracted in GDP. It is the Gross, not Net Domestic Product.”
You misunderstand.
I did not mean it was subtracted, but if it were not included. Normally, GDP is overwhelmingly consumer spending, most of the rest business spending, and a small percentage is government spending. But with military spending and other spending on privateers exceeding a trillion dollars, and they are counting that as private-sector growth…
This has been occurring as early as the 4th QTR 2001, albeit in a smaller form back then. Even though GDP was reported as positive in the 4th QTR 2001, and the NBER claimed the national economy had exited recession, it was actually still negative, as reported here:
And the band played on.
.
Stagflation, anyone?
Where’s my disco music? Feels like the 70s to me!
Look at the Durables part of GDP. Commerce has it up 4.4% in Q3 when their own monthly data is negative!
The stocks that need the help the most from fed rate cuts, the financials and homebuilders, are down and all the fed has done is spur inflation with commodity stocks on fire.
Small nitpick: BR got his math wrong in the 2nd-to-last line. With the consensus price deflator, GDP would have been 2.7% (nominal=4.7 – consensus=2); with the average over the last few years it would have been ~1.7%.
GDP Price index change: 0.8%
components
PCE 1.7%
Pvt Domestic Investment -0.7%
Govt Expenditures 3.0%
Exports 4.0%
Imports 8.1%
GDP=PCE+Investment+GovtExp+Exports-Imports
The imports are subtracted, so are import prices. Rising oil prices and imports reduces GDP and GDP prices. That is why the 0.8% price change (perverse isn’t it).
Prices on Gross Domestic Purchases is 1.6%. That is closer to the truth. 0.8% is a bogus number but not in the sense you imply.
Bygones…
Party on Boone!
Good posts folks but I’d like to note one thing:
To the extent that National Accounts and GDP fail to differentiate outputs and outcomes, there is also a failure to differentiate between productive and unproductive. This is an error inherent to the above mentioned accountings and, in such a service ‘driven’ economy as the U.S., necessarily results in mis and overstating of growth, not just this or that Q but year after year after decade…
Differently, not all necessary activity should, from the perspective of capital, be taken to be productive, not all private domestic investments are investments while same time, portion of consumption expenditure is unproductive consumption.
As far as I remember, GDP stands for gross DOMESTIC product. Why would the rising price of something like crude oil, produced almost exclusively outside the US, push up the GDP deflator? Put another way, if the price the Saudi’s receive for every barrel of its crude oil goes up, has US nominal GDP risen? Of course not.
Yes, rising energy prices raise the deflators for domestic spending on energy, particularly by consumers. But that would be largely offset by increases in the import price deflator.
But even then, what households consume is not crude oil but finished gasoline, which fell from $3.00 a gallon at the start of Q3 to $2.85 by the end.
Re-examining GDP
RE-EXAMINING GDP….Sure, consumer spending is down a bit, but GDP rose 3.9% last quarter and the Fed cut interest rates yesterday. So why is the market apparently in such a panic? Part of the reason is that credit markets are…