Q2 GDP 1.9%; Q4 GDP = -0.2%; New Jobless Claim +448k

Across the board, this was simply a horrible, recession set of data:

Initial Jobless Claims448k. That’s the worst level since April 2003.

Q2 GDP: 1.9%, well below consensus of 2.3%.

Q4 GDP Revisions: Revised from +0.6 down to –0.2%; The first negative quarter (Don’t say we didn’t warn you) since Q3 2001.

Q1 GDP Revisions: Revised down to 0.9% from 1.0%

Note — I expect these revisions will get revised even lower in the future.

Durable Goods:

Consumer Spending: Despite $100 billion in rebate checks, consumer spending was up  only .56% — the bulk of which was (undercounted) food and energy inflation. Nominal spending for the quarter was 3%.   

Inflation: The personal consumption expenditure price index rose at a 4.2% annual rate.

Revisions: A major set of revisions, and nearly all were negative. The economy contracted in the last three months of 2007, providing the first negative quarterly GDP data. Q4 GDP 2007 was revised to a negative number from +0.6% to -0.2%. And, this is very likely to be revised even lower in the future.

Just nasty numbers across the board.

One last "surprise" — Bill King observes that the GDP Price Index inexplicably tanked to 1.1% in Q2; 2.4% was expected. Nominal GDP declined to 3% from Q1’s 3.5%. Thus, the Q2 GDP benefited by 1.5% points, thanks to the mysteriously collapsing GDP Price Index, down to 1.1% from Q1’s 2.6%.

Hence, I expect Q2 2008 GDP to eventually get revised downwards to 0.4% — or worse.

Here are the charts:

>
Real GDP Growth
Real_gdp_q2_08

Chart courtesy of Barron’s Econoday

>
New Jobless Claims
July_31_new_claims
Chart courtesy of Barron’s Econoday

>

Larry, you have some ‘splainin to do!

James, are you really going to make me wait for that Bladerunner DVD?

>

Previously:
Recessions Often Begin With Positive GDP Data (May 2008)

http://bigpicture.typepad.com/comments/2008/05/positive-gdp-re.html

Sources:
GROSS DOMESTIC PRODUCT: Second Quarter 2008 (Advance) 
BEA, JULY 31, 2008
http://www.bea.gov/newsreleases/national/gdp/2008/gdp208a.htm

Summary of GDP Revisions
http://bigpicture.typepad.com/comments/files/summary_of_gdp_revisions.pdf

Related:
U.S. economy suffers fourth-quarter contraction
Revisions show spending slower, profits higher than previously thought
Rex Nutting
MarketWatch, 9:01 a.m. EDT July 31, 2008
http://www.marketwatch.com/news/story/commerce-dept-concedes-us-economy/story.aspx?guid=%7BB40570D2%2D40FB%2D45BD%2D8920%2DFEC19E1A1F26%7D

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What's been said:

Discussions found on the web:
  1. Donny commented on Jul 31

    OMG … Jobless Claims up 44,000. How the hell do jobless claims increase 10% in one week? WTF?

    Either it’s an anomaly, or something has gone, very, very, wrong.

  2. mephisto commented on Jul 31

    Man, it is downright amazing as to how UNmentioned those revisions were to the last 2 Qs. Another leg of the bull stool kicked out.

  3. w commented on Jul 31

    the gdp price index looks surprisingly good….

  4. CNBC Sucks commented on Jul 31

    Dow futures down 123. Maybe we are down 200 today. Tomorrow up 225. Monday down 160. Yawn. You keep presenting facts, BR. The market doesn’t care anymore about facts.

    I approved some guy writing the insightful comment “idiot” on my blog today, but it seems I am not the idiot.

  5. Renting in Mass commented on Jul 31

    How common is it to have a revision bring the GDP from positive to negative? When is that last time that happened?

  6. Jeff commented on Jul 31

    Heard from Jimmy P. regarding your bet, BR? I’ll bet not. These guys never like to admit they’re wrong.

  7. carl erickson commented on Jul 31

    I don’t suppose we will hear anymore of the CNBC permabulls pointing out that this can’t be a recession because unemployment claims haven’t reached 400,000. One more false scenario diescared.

  8. Steve Barry commented on Jul 31

    Shame that 10 day MA on put/call is near 0.9. Sentiment is way too bullish to get slammed with data like this. Could see massive down day…300 points or more. The CNBC guy at Nasdaq seems very deflated.

    What will be the argument of the no recession crowd now? That we only had one negative qtr, then rebounded so it is no recession? The stimulus checks artificially pulled some demand in from the future. But the price to be paid is a half trillion deficit.

  9. Steve Barry commented on Jul 31

    Saw CNBC promo for Mad Money yesterday that strongly hinted that Cramer was THE one guy last August, through his famous rant, that signaled problems coming in credit markets. My memory isn’t perfect…but that is not quite how I remember that. That rant came as things were well on their way to blowing up. Now Cramer called the market bottom yesterday. What a signal to short the hell out of it.

  10. Jeff commented on Jul 31

    My memory ain’t what it used to be either, but it’s still pretty good (ask my wife). Cramer was still calling DOW 14,500+ by the end of ’07 AFTER his rant. He still thought it was up, up, up all the way even after things went sour in October after the highs. Trust me, this guy revises history ALL the time. He is often right about certain stocks (but, hey even a monkey can pick some good ones once in a while), but he was dead wrong on this. Sure, he threw a little trantrum last August, but he was very very late to the game admitting the broader implications of this mess on the wider economy and markets. Every time I see that promo now, it makes me sick because most people won’t realize how wrong he was on the bigger point

  11. Jeff commented on Jul 31

    And of course the markets are climbing their way off their lows – Dow down only 66+ right now. Someone said it earlier – obviously people either haven’t looked at the data, or don’t understand it, or simply don’t care. It’s buy, buy, buy all the time regardless of the data or fundamentals. Keep on buying. This ain’t the bottom. Not even close. Just more ETF shorting opportunities for the rest of us, assuming Cox doesn’t make those illegal as well.

  12. Juhuti commented on Jul 31

    The Desk started the day with 5b in repos. It quickly added two more for 10b and 8.75b. The TSLF for this week is 50b. They will stop at nothing to keep up the dream (or better yet nightmare) alive.

  13. Andy Tabbo commented on Jul 31

    Sort of interesting how CBNC is “celebrating” the one year anniversary of the “credit crisis.” The implication is that things really started to go to hell back in July/Aug last year. What nobody is pointing out is the humourous way the SP500 hit a new high later in the year and actually peaked in Oct 2007.

    I use the 15% rally from Aug07 to Oct07 as EXHIBIT A that markets are not efficent and it’s not a random walk. For the market to rally to new highs in the face of an unraveling credit bubble and weak housing market was just ridiculous.

    – AT

  14. Steve Barry commented on Jul 31

    A moment of lucidity just hit Erin Burnett…it bothers her now that Visa and Mastercard are making money by extending credit and have sold the risk of default to other parties. Sounds a bit like sub-prime, huh? Big difference though…you can’t foreclose or repossess a tank of gas…a vacation…a Chinese restaurant meal. TOTAL LOSS.

  15. mhm commented on Jul 31

    Does anybody know a service that gives a cross reference between stocks and ETFs? I’d like to know which ETFs own a particular stock. TIA.

  16. Jeff commented on Jul 31

    Individuals and the country are just burying themselves in more debt to play the old Dean Smith “four corners offense” until the next bubble is created by the next media-dubbed “Maestro”. It won’t work this time…..

  17. CNBC Sucks commented on Jul 31

    That great used car salesman of the stock market, Bob Pisani, just said the Dow (at -66) was off its lows because of the July Chicago PMI data. See! All you need is one quarter-sliver of hope and that’s enough to convince “them” to buy. You can’t bet against “them” especially since “they” won’t allow certain (or all?) stocks to be shorted anymore. I am also amazed how well AMERICAN traders have been bashing down oil prices the last few weeks. I notice oil goes down the most during US trading hours. It’s great for the American stock market, but that just gives China the opportunity to hoard oil at these bargain basement prices. If the Chinese had just built their reserve infrastructure by now, these oil prices would not have dropped.

  18. Dave commented on Jul 31

    Does anyone have an intelligent explanation why the ATA (American Trucking Associations’) Truck Tonnage Index has posted 8 straight months of y/y gains with Tuesday’s report of June being the largest %increase in over three years. This seems counterintuitive to me given the slowing U.S. economy. Thanks in advance.

  19. dave c. commented on Jul 31

    Actually this is GREAT news for the market! It gives cover for Uncle Ben to LOWER rates 50 more bps, AND it means “all the bad news is out” so we can go much higher from here!

    OK, can I get a job with CNBC now? :~)

  20. w commented on Jul 31

    re dave:

    don’t know if it’s an intelligent comment …but suspect less driving to the mall shopping and more online ordering/shipping to avoid state and local sales taxes. I would note they don’t seem to upbeat yet either:

    “ATA Chief Economist Bob Costello said June’s solid tonnage reading matched several anecdotal reports from motor carriers. Despite the uptick, however, he noted that it remains a close call whether the general economy will dip into a recession later this year or if it will only slow significantly.

    “It seems that truck tonnage is once again leading the U.S. economy,” Costello said. “During the 2000-2001 cycle, trucking pulled out of a recession before the aggregate economy fell into one. Unfortunately, truck tonnage could slow later this year as the overall economy is expected to be quite weak in the fourth quarter and the first quarter of next year.”

    I hope this helps

  21. Monica Starr commented on Jul 31

    The purveyors of the so-called dismal science are sometimes inadvertantly funny. To wit:

    “First-quarter growth was little revised (0.9% from 1.0%), but the 2007 fourth quarter was revised to minus 0.2% from plus 0.6%, making the downturn look much more like a “W”-shaped recession, according to S&P Economics.”

    Let’s hope the media remembers to call it the “W” recession once the next President is in office so we’ll remember that this mess is the legacy of George W. Bush.

  22. bluestatedon commented on Jul 31

    Gee, seems like it was just yesterday that the market jumped bigtime largely on rumors of an “unexpected increase” in the employment numbers from ADP, and the TV talking heads were crowing about it. In light of all the recent BKs and layoffs, that just didn’t make sense, and I was suspicious that there was some bullshit being tossed out anonymously in order to goose the market up.

    Wait, that WAS yesterday.

  23. Jeff commented on Jul 31

    They won’t remember that this was/is clearly W’s recession because nitwits like Bowyer and Luskin will have perfected their talking points that it’s Obama’s fault, except of course if McCain wins. Then it’s the Dem congress’ fault. And what’s worse is, that much of the gullible, ill-informed, lazy public will buy it.

  24. leftback commented on Jul 31

    Gee, I guess the ADP report may have been optimistic.. ??

    Yesterday’s nonsense was a gift for bears, surely there is NO WAY that tomorrow’s NFP number will reflect the “+ 9000” jobs “created” in ADP survey. Who are these ADP clowns anyway?

    With a 440,000 initial claims, who would bet against a -100,000 number tomorrow? That would certainly stretch the credulity of Cramer’s bottom call. Cramer + Luskin + Kudlow = a perfect contrary indicator.

    The ongoing rise in unemployment is death to commercial RE, retail, and energy stocks (no more driving to work if you ain’t got a job, no more delivering stuff in trucks if people are not buying, no more heating and cooling empty offices).

    Next time the market falls sharply, it will be interesting to see what happens. As a mini-rally develops, shorts will cover and… OH WAIT, they smoked out the shorts, now there is no-one left to save the banks from oblivion !!! Be careful what you wish for.

  25. Michael Donnelly commented on Jul 31

    W. Yes GDP inflation was very good only up 1.1%. But that of course is the amount of inflation produced domestically. As if anybody gave a flying fig where inflation comes from.

    Overseas inflation? Not so much. Up 28%. Personal Consumption inflation up 3.7% y/y the most in 18 years.

  26. Alfred commented on Jul 31

    4Q07 revised to neg 0.2 from pos 0.6. Is this proof that a recession already started? Certainly not!
    2Q07 was revised higher to 4.8 from 3.8. Taken the two quarters together the revisions are actually up. For the full year of 07 GDP was revised lower to 2.3 from 2.5. Growth has continued into 08 with advanced GDP of 1.9 pc in the second quarter. Exports contributed about 2 pc this quarter and as long as infaltion does not completely choke off trade this will keep the economy growing.

  27. Steve Barry commented on Jul 31

    Pisani says hedge funds have put 48B from short ETFs and moved into long ETFs in July…He says that may signal a bottom. Of course if they had moved it the other way, he would say too much bearishness indicates a bottom. I think this is actually a bearish piece of sentiment going forward.

  28. rex commented on Jul 31

    Warning: The jump in jobless claims is meaningless. Don’t be distracted by it. It’s entirely due to technical factors unrelated to how sucky the economy is.

    This explains it: http://tinyurl.com/6j43dd

  29. Noah commented on Jul 31

    The govt backed EUC program is what contributed to the surge in jobless claims.

    http://www.urbandigs.com/2008/07/jobless_claims_surge_euc_progr.html

    Q: What is the federal Emergency Unemployment Compensation (EUC) Program (also known as the Extended Benefits Program)?

    A: EUC is a federally-funded program which provides up to 13 weeks of extended unemployment insurance benefits in all states to unemployed individuals who have already collected all regular state benefits or have expired benefit claims and meet the federal eligibility guidelines.

  30. Jeff commented on Jul 31

    All Pisani needs is a mini-skirt and set of pom-poms and the character he plays would be whole.

  31. Andy Tabbo commented on Jul 31

    Bob “I only know what people tell me” Pisani just explained to the audience that there were signs of a bottom in housing because sales have been picking up in the San Joaquin Valley, “the epicenter of the housing crisis”…sales have ticked up 5 MONTHS in ROW!

    Then he went on to add that 8 out of 10 sales were foreclosures.

    Um, Yeah.

    I’d say that area is probably bottoming. I’ve never heard of anything like that before….8 out of 10 sales are foreclosures? No kidding sales are ticking up…banks are just dumping them at any price.

    – AT

  32. Scott Thompson commented on Jul 31

    Anyone want to bet against the notion that now the Q4 ’07 has been revised negative, Q1 ’08 will be as well, and in the rearview mirror our fearless leaders will say, “Look, minions, there WAS a recession, but it’s so far in the past and we are doing great! All is well. There will be growth in the Spring (apologies to Chauncey Gardner..)”

  33. Alfred commented on Jul 31

    rex,
    Thanks for this clarification. I think this mornig’s sell of was mainly because of dissapinting jobless claims.

  34. Michael Donnelly commented on Jul 31

    Alfred please. You’ve got a nice web site, but come on.

    Employment and Unemployment are the best way to measure when a recession started and they both confirm the recession started in the 4th quarter. The -0.2% is just the icing on the cake, once we admit we are in a recession we just might be able to agree on how to remedy the situation

  35. Vermont Trader commented on Jul 31

    I think that this is the part of the movie where there is no place to hide and the bear kills everyone..

  36. zackattack commented on Jul 31

    Ah, these days, I save my ire for Financial Entertainment Television. I used to believe it was actually a Vast Bullish Conspiracy, but now I’ve come to realize that it’s just an unfortunate confluence of interests.

    CNBC needs to sell ads targeted to millionaires. They remember how GE almost pulled the plug on them in 2002. They also recognize that we are Long Nation. They will have a bias to say anything necessary to make the wealthy feel better about the state of their portfolios.

    Cramer, well, as long as there are 3-card monte games and hordes of people who need to plug their umbilical cords into a father-figure, there’ll always be market gurus. He’s the Joe Granville of this era, substituting the “Buy, buy, buy!” button for Granville’s piano.

    He has a product to sell – subscription services to RealMoney. I understand that the AA Plus portfolio has sucked wind for a while now. So his interest in formenting a new bull market is entirely understandable.

    I pay for the RealMoney product. The only place I can see I’m getting value is from Rev Shark, who’s been pretty spot-on this year.

  37. Michael Donnelly commented on Jul 31

    BTW: GDP was 2.0% in 2007, which officially sucks. The recession in 1960 was 2.5%. Once you get 2% growth or less (only happened 10 times since 1960) You are in stall speed. One of two things happens, you are: in recession (7 times), or about to enter one (3 times including 2007)

    Nominal growth same story. At 4.8% in 2007 we’ve only had nominal this slow 9 times in the last 48 years.

  38. Steve Barry commented on Jul 31

    Zackattack,

    Great summary about Cramer…loved the Granville comment. Like Dan Dorfman, Mark Calandra…don’t all these types go down in flames sooner or later? Cramer is all about selling subscriptions…he can get most of the calls wrong longer term, but because a call can pop a stock quickly, people feel they need to pay for the insider advice not seen on TV.

    Today is a Cramer rally in QQQQ…he really pumped RIMM yesterday and it is up 4% for that alone. But it should fade later on as the dumb money is in and the smart money shorts the Cramer pop.

  39. jason commented on Jul 31

    “Desk started the day with 5b in repos. It quickly added two more for 10b and 8.75b. The TSLF for this week is 50b. They will stop at nothing to keep up the dream (or better yet nightmare) alive.”

    Juhuti, could you elaborate some on your point? I assume you are making reference to the President’s Working Group on Financial markets, but I’ve never been clear on this.

  40. Alfred commented on Jul 31

    Michael,
    I do not disagree with you on the economy. This is the worst story never told, to paraphrase (with slight changes) a well known political pundit. Where I disagree is the timing of a recession call. What most of you forgett is the global growth story which has been in the past and although weakening to some degree still is the best as its ever been.

    The whole point of my discontent is critique of the Federal Reserve, who really sank the boat by slashing interets rates when they should have resisted the mounting pressures of inflation. By doing so they might very well choke off and contribute to end this compelling global growth story.

    In this case you will get your recession.

  41. Juhuti commented on Jul 31

    Jason,

    It’s used to add liquidity to the market. The banks and PD’s are technically insolvent. They can’t buy futures or certain stocks to support the market without the repo. That’s my take on it. If someone else has more insight then please contribute. I’m still trying to figure what makes the market move contrary to the information that’s out there.

  42. Ritchie commented on Jul 31

    Dave: “Does anyone have an intelligent explanation why the ATA (American Trucking Associations’) Truck Tonnage Index has posted 8 straight months of y/y gains…”

    You might want to look and see what has happened to rail tonnage shipments over the same time period. Rail could be down in sync with the economy–but shippers are switching to trucks for smaller loads, meaning, overall, more trucking–but less rail.

    Now, if rail shipments are also up, then who the heck knows what is going on.

  43. Vermont Trader commented on Jul 31

    Chicago PMI prices paid was 90.7…

    The highest since March 1980..

  44. CNBC Sucks commented on Jul 31

    Vermont Trader, others: Is the Chicago PMI index inflation adjusted? You say prices paid were the highest since March 1980. Did that contribute to the NAPM being above 50?

  45. Vermont Trader commented on Jul 31

    no and not directly. It’s diffusion index which means survey responders just say biz is stronger or weaker.. however inflation should effect the dollar volume of biz that respondents report on

  46. Michael Donnelly commented on Jul 31

    I was begging for an early cut in the spring of 2007, and thought the weekend panic 75bp cut (Jan 22) was a mistake. Overall Bernanke is Ok.

    A year ago crude prices were up 14%, but intermediate PPI, finished PPI, and CPI were all at 3% and consumer price expectations were low. Inflation didn’t look bad.

    I thought a recession was coming, but I also thought the deflation coming from falling home prices (which dwarfs in size the stock market and GDP combined), combined with the normal price drop we always see in a recession would keep a lid on inflation.

    70% of price is wages, with rising unemployment folks are too scared to ask for a raise.

    The Fed certainly can’t cut anymore, and the next move will be a hike, but a pause is ok for now.

  47. Joshua commented on Jul 31

    (C)hartered (N)aval (B)usiness (C)ommontary-April 15, 1912:

    Mary Barry:: Stocks in the Deck Chair Rearrangement sector (DCR) have skyrocketed in per-trading as reports have come filtering in that movement of deckchair have shown volatility at an all time high based upon the recent Trans-Atlantic crossing of the RMS Titanic. So, does them indicate another bull market sector for investors? Let’s ask our guests, Robert Pisani and Jammison Crammer:

    Robert: Mary, I am down here at the New York Stock Exchange and, let me tell you, the investors have no idea what to make of this news. There was some rapid appreciation in the Deck Chair Rearrangement stocks, as well as in the Trans Atlantic Shipping (TAS) Index as soon as this news came out. And…

    Jammison Crammer: Oh, Robert! You are so full of Bull. I have been calling for a Bull Market in (DCR) since Q1 of ’10. This isn’t unexpected. I have been calling this for years! You should listen to my telegraphs more often!

    Robert: No, No, No, Jammison, just last year you were complaining about how poorly the (DCR) would be performing over the next 4 decades…

    Jammison Crammer: Robert, please, you should just listen to my telegraphs more often. Just last week, I was calling for both DCR and TCS to be a “buy, buy, buy” because of their huge growth potential. Ok, so Q1 of ’10 was a little early, but I think this market is going to bear me out….

    Just having fun with this one kids….

  48. Scott commented on Jul 31

    Watching/listening to Greenspan on the Cheerleader Nookies Buy C’mon! channel, I’m reminded of Ol’ Uncle Miltie Friedman in his dotage: smug and infallible (in his own delusional mind). Greenspan spins his bullshit a lot better than J Cramer, but he’s still just spinning bullshit. What a tool (of GE and the like, actually).

  49. CNBC Sucks commented on Jul 31

    Hey Joshua, you should start your own CNBC Sucks blog. I am just harvesting page views now, hoping that I get as many Barack Obama impressions on anybody who visits. (It’s AMAZING what page view staying power “Becky Quick is the hottest flat-chested chick of all time” has; people must be rereading and reliving the brilliance of that page 15 – 20 times.) It takes too much precious time to come up with new content, so please, start a CNBC Sucks blog. Well, you might want to use dennisknealeisanidiot.com instead.

  50. Dirk van Dijk commented on Jul 31

    This morning the government came out with its first stab at the second quarter GDP numbers, as well as revisions to past periods. While the headline growth of 1.9% (all percentages are annual rates) was a bit less than the market was expecting, it was far from recessionary. However there appears to be far less to the number than meets the eye, and the revisions were generally to the down side. Each of the last three full years was revised down. Growth in 2005 is now seen as having been 2.9% rather than the previously reported 3.1%, for 2006 it was 2.8% not 2.9% and for 2007 it was 2.0%, not 2.2%. Within 2007, there was an upward revision to the second quarter, but a big downward revision to the fourth quarter. Growth in the fourth quarter was actually -0.2% rather than the plus 0.6% number that had been in use up until now. The first quarter was revised down to growth of 0.9% from 1.0%.

    Within the second quarter numbers there was some good news. The change in private inventories actually subtracted 1.92 percentage points from growth. Usually declines in inventories are made up in later quarters, so one might be tempted to argue that the second quarter was much stronger than the headlines let on. Real final sales were up 3.9%, which is a fairly healthy showing. What were the drivers of GDP growth in the second quarter? Personal Consumption Expenditures (PCE) added 1.08 points to GDP growth (i.e. 57% of the 1.9% total growth), largely due to strong showings for Non-Durable Goods and Services, while Durable Goods sales were a drag on growth, most notably vehicle sales which subtracted 1.07 points from growth. The PCE growth was much more significant than in the first quarter when it added only 0.61 points to growth.

    Building was a big help, as Investment in Non-Residential structures was up 14.4%, adding 0.51 points to growth. Residential Construction continued to be a drag on growth, but less of one than in the first quarter (or the fourth quarter for that matter). It fell 15.6%, subtracting 0.62 points of growth, which was not as bad as the 25.1% decline subtracting 1.12 points from growth in the first quarter.

    International Trade was the real hero of the quarter, Exports surged 9.2% adding 1.16 points to growth while imports fell 6.6%. Falling imports add to growth in the GDP calculations and that decline added 1.26 points to growth in the second quarter. Thus taken together, net exports added 2.42 points to growth, or significantly more than the total growth of 1.9%. This was a big improvement over the first quarter when net exports added 0.77 points or the fourth quarter when they added 0.93 points to growth.

    Higher government spending also added to growth. Overall Federal spending grew 6.7% adding 0.48 points to growth, of which 0.36 came from defense and 0.12 came from increased Non-Defense spending. In the first quarter Federal Spending added 0.41 points to growth while in the fourth quarter it actually slightly subtracted from growth (0.04 points). Increased State and Local spending added 0.20 points to growth.

    Ok, now that we have gotten all those numbers out of the way, what does it mean? Well clearly the stimulus checks helped with PCE, but it is interesting to mote that most of that went for non-durable goods like food and energy, not to durable goods like autos. Second debasing the currency can help growth at least in the short term, as the weak dollar is clearly a factor in the strong net export showing.

    The debasing the currency part brings us to the real fly in the ointment in this release, and a reason that every one of the numbers cited above should be taken with a few pounds of salt. We are talking about real GDP here, not nominal, which grew at a very low 3.0% following 3.5% growth in the first quarter. Real GDP depends pretty critically on the implicit price deflator used to translate nominal GDP into real GDP. The government would have you believe that inflation in the second quarter, at least the inflation measure used to calculate GDP, was running at just 1.1%, down from 2.6% n the first quarter and 2.5% in the fourth quarter.

    Unless one has recently ingested large quantities of peyote, that is a very hard number to believe. Now I don’t like to say bad things about the ref, it usually is just an excuse used by a bad coach, but really now folks, this simply does not pass the smell test. Every other measure of inflation was far, far higher than this, and was accelerating in the second quarter. The CPI rose at an annual rate of 10.3% in the second quarter and was up 5.0% on a year over year basis, the PPI was up at a 14.3% rate in the second quarter and was up 9.1% year over year. I know there are technical differences in how the indexes are constructed, and that the implicit price deflator is designed to measure domestic inflation and much of our inflation has been imported, but these are HUGE differences. Plug in any realistic measure of inflation and the growth vanishes.

    I have no proof of anything nefarious going on here, but I have yet to see a convincing explanation for this very low inflation number. Then again, this is an administration that had the VP go over to “closely question” any CIA analysts who were not on board with the idea that Saddam was about to launch a WMD attack on U.S. cities. It is an administration that in job interviews to fill non-political carrier prosecutor positions at the Justice Department questions like “What is it about George Bush that makes you want to serve him?” It does not take a tin foil hat to think that just perhaps someone was leaning on a few G-10’s at the BEA, to “reexamine” their inflation assumptions for the report. If anyone in Congress asks, just claim executive privilege and stonewall them. Of course it could be some unexplained technical factor or something going on with seasonal adjustment, but anyway you slice it, the inflation number which is central to this report, looks very fishy.

    I expect this number will be revised down over the course of time

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