GDP, Inflation & Recession

Why do I spend as much time as I do debunking inflation, employment and housing data? Today, you will see precisely why. 

At 8:30am, we get the advance GDP data from BEA. Consensus is for a marginally positive data point — 0.3%. This will follow Q7 2007  of 0.6%.

In terms of debunking the misleading data stats, today is the day where the rubber meets the road. Why? Well, if the official inflation data was reported in a way that was more reflective of reality, Q4 last year would likely have been anywhere from 0.75% to 1.5% lower (if not more), sending it into negative territory.   

The same will be true for today’s GD data point, with the probable overstatement enough to keep it marginally positive or flat.

Why does inflation matter so much to GDP? Gross Domestic Product (GDP) is the "broadest measure of aggregate economic activity and encompasses every sector of the economy." If you want to know understand how weak or strong an economy is, GDP is where you begin. But, you need to determine how much of GDP is nominal, and how much is real (i.e., after inflation growth).

Consider an economy that sold $100  worth of goods and services in one quarter. The next Q, it produced $110 worth. When determining the GDP of this economy, you want to know how much of those gains was additional output, and how much merely price increases.  Its usually a combination of more widgets and higher  prices, so if you want to know exactly how much the economy expanded, you need to know exactly how much inflation there was. Understate inflation, and you overstate growth. 

If today’s GDP is marginally positive, following Q4’s marginally positive
GDP data, then we officially will not be in a recession by the classic
"2 consecutive quarters of negative GDP growth."  This means that if the correct inflation deflator was built into GDP, we would have our two consec quarters.

Hence, for the reality based community, the recession will be officially here.

Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.

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  1. cinefoz commented on Apr 30

    BR queried: Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.

    Please clarify: 2.5% at what rate of time? I believe oil, food, and other hard assets do this on an almost monthly basis now that overly abundant low cost credit is bidding up prices of commodities.

    I remember the good old days not too very long ago when I didn’t give a shit. I could always adjust my behavior to avoid the increases and stay on the good side of the updraft.

    Then I read a book on asset bubbles written by a large number of experts and heard of Greenspan’s incompetence; where he claimed asset bubbles were impossible to recognize until after they burst … and even if they were recognized you couldn’t do anything abou them except clean up the mess afterwards.

    I’m sorry to say I was shocked at the stupidity of those who are supposed to be in charge and maintaining control. I’m starting to think that stupid should be a criminal offense punishable by asset forfeiture and jail time. Should SarBox II be created, but this one deals with taking personal responsibility for being a plundering retard?

  2. patrick commented on Apr 30

    The critical functions of yet another executive branch department have been manipulated to political ends. Add Commerce to the list with Justice, Labor, and Defense (and FED). These key governmental offices are charged with carrying out operations deemed vital to national wellbeing but under the Bush administration, have been deceptively and deplorably politicized for the narrow gains of an authoritarian who fancies himself a stand-up comic.

    Contorting GDP figures to reflect the political necessity of avoiding an “official” recession is as dishonest and underhanded as compelling political prosecutions, overstating job creation and employment, and controlling war criticism and dissent via propagandizing military analysts.

    All of these self-serving actions are at the behest of an unaccountable man who is hell-bent to saddle his successor with the nearly intractable problems of his making. This is why these key offices need leaders truly -independent- of the disgustingly political motivations of a unitary executive; for the sake of our economy, for the sake of our national integrity and security.

    The “what recession?” and “what inflation?” shell-game is going to destroy this country’s ability to handle the even more difficult problems yet to be fully realized (namely oil).

    George Bush has us in a hole and wants to keep digging. Energy independence is a joke, and drilling ANWR is akin to a crackhead temporarily cooking his own crack. After that’s gone, he’s still a crackhead and the crack dealer still has all the crack required to feed his now more-severe addiction. This situation is utterly destroying our economic vitality.

    “Marginal GDP” my ass! This is total bullshit, and I’m sick of this dishonesty destroying the country I love.

  3. kio commented on Apr 30


    Fortunately, all your claims are quantitatively worthless before you can create a system which completely replaces the BEA with its NIPA procedures and methodology. As I see it ( ), the methodology is biased but consistent over time, so provides precision instead of accuracy.
    When you claim something is wrong, you should articulate directly what particular data and procedures (as presented in technical documentation) are not relevant in the determination of the GDP deflator.

    If (suddenly) successful in this affaire of the replacement, you will be criticized in the same way you criticize the BEA now.

  4. Steve in TN commented on Apr 30

    My post may be a little off message, but it does pertain to inflation.
    I was reading autoblog where readers were responding to the gasoline consumption problem in the U.S. The question is:
    Is a gasoline tax the way to go to cut U.S. gasoline consumption?
    Amazingly, by 4 to 1, the answers were yes!
    Our politicians are behind the curve, too afraid to institute a policy that will work and that the public would probably back.

  5. Francois commented on Apr 30

    “As I see it ( ), the methodology is biased but consistent over time, so provides precision instead of accuracy.”

    Like we should care about precision, right? If you’re hunting and your weapon is precisely wrong by 4 feet at 300 yards, you still miss the mark.

  6. Greg0658 commented on Apr 30

    autoblog via Steve “Is a gasoline tax the way to go to cut U.S. gasoline consumption?
    Amazingly, by 4 to 1, the answers were yes!”

    in Paul Harvey speak “Now the rest of the story” .. were the respondents pitched mass transit to get their weary commuter butts in a lounge seat and outta traffic?

  7. Tom commented on Apr 30

    I’m still waiting for post after post explaining how the BLS’s calculation of the cost of housing is biasing the inflation number upward. It’ll be the flip side to all those posts in 2006 pointing out the opposite.

  8. kio commented on Apr 30


    For economics and economy, it means that you have to shiftall previous estimates of real GDP and GDP deflator in the same way. It happens in comprehensive revisions which the BEA implements (approximately) every 5 years.

    Also, high precision is much better than low accuracy. One can make a consistent correction (as snipers do) and shoot well, when precise. Nothing helps if one is inaccurate.

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