GDP: Lowest Inflation Rate in 5 Years

Barron’s Alan Abelson takes a look at Thursday’s GDP laugher, and sees the same issues we noted, plus a few more:

"GDP, IN COMMON PARLANCE, stands for gross domestic product, or the aggregate value of all the goods and services produced on these blessed shores. Or, at least, that’s what it used to mean in those long-gone days of yore, when life was simpler and government statistics credible. These days, alas, those initials more typically signify "gross deceptive pap."

The insidious change has not gone unremarked, both in this magazine and by more than one skeptical scanner of the turgid flow of numbers flowing out of Washington. Yet purportedly professional seers, who draw handsome paychecks for sifting through the unending streams of digits and making sense of them for hoi polloi like us, deferentially pass along the official numbers unsullied by even a modicum of analysis, as if they were holy writ, especially when they’re upbeat.

A case very much in point was last Thursday’s revised report on second-quarter GDP, which helped spark a nice, if something less than enduring, leap forward by the stock market. The initial version released in July posited that the venerable economic barometer had risen by 1.9% — up from the first quarter’s meager 0.9% gain, but obviously no great shakes.

Comes now the so-called preliminary estimate that claims second-quarter GDP grew by a much more robust 3.3%. That was hailed by the incorrigibly constructive contingent in the Street as evidence of the resiliency (favorite word) of the economy and prompted the thinned-out ranks of investors to put their worries and their plans for an extra-long weekend on hold and pile into stocks. Hooray! Hooray!

But even a cursory look at what they’re drooling over reveals pretty thin gruel. Nothing, for sure, that would cause any sentient being to start humming "Happy Days Are Here Again." For the ostensibly better GDP showing is a mirage, conjured up by the usual suspects out of smoke and mirrors.

The key here is the GDP deflator, which purports to adjust GDP for the impact of inflation; it’s a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.

Thus, according to this accommodating measure (accommodating, that is, if you’re determined to put a good face on a dreary report), inflation grew at an improbably restrained 1.33% in April-June. And maybe it did — but not in the good old U.S. of A. However, obviously more important than accuracy to those doing the calculating is this simple equation: The lower the deflator, the greater the growth of GDP.

John Williams of Shadow Government Statistics, whose incisive description of the decades of willful distortion of inflation by Washington we cited a few weeks ago, points out that the supposed 1.33% increase in the second quarter would represent the lowest inflation rate in five years. Must be that plain folks stubbornly refuse to recognize the dramatic drop in inflation, because, as Phil Gramm said, we’re such a bunch of whiners.

Of course, even by the government’s not entirely extravagant figuring, the consumer-price index was up a hefty 8% in the latest quarter. Perhaps the computer that tallies the CPI doesn’t talk to the computer that measures the deflator.

By John’s reckoning, "a second-quarter year-to-year contraction of 2.9% would have been more in line with underlying fundamentals, past methodologies and the ongoing recession."

He suggests that a more telling picture of the economy’s progress or lack of it is the alternative to GDP, known as gross domestic income, or GDI. It’s a rough equivalent of GDP but measures the nation’s income instead of production.

According to John, after adjusting for inflation, GDI in the June quarter weighed in at an anemic 0.5%, atop negative growth in the preceding two quarters — which, as it happens, meets the popular definition of a recession.

Friday’s disclosure that personal income in July suffered its biggest decline in three years doesn’t exactly portend a rebound in the third quarter, and certainly didn’t come as a big surprise to John, who sees the outlook for the economy remaining glum, with no early end to the banks’ solvency crisis, as he terms it, nor the inflationary recession. (Emphasis mine)

Also worth noting: Merrill’s David Rosenberg looks at the GDP version of Banks & Brokers profits:

THE ASTUTE ECONOMY-WATCHER for Merrill Lynch, David Rosenberg, also strongly advises digesting the suspect GDP report with a "very large grain of salt." Among other things, he casts a skeptical eye on how the report treats the decline in corporate profits. (We won’t keep you in suspense: The answer is: "gingerly.")

More specifically, he notes, "national-account corporate profits declined at a 9.2% rate in the second quarter." For domestic industries, he goes on, profits are down 14.4% year over year.

But according to the GDP report, domestic nonfinancial profits fell at a much sharper 22% annual rate. The reason the drop in total corporate earnings was limited to 9.2% was that, David relates, profits in the financial sector, so claims the report, surged — get this — at a 27% annual rate.

His wonderfully eloquent comment:

"Are you kidding me?"

My original comment stands: If you believed that US economy grew at a 3.3% annualized in Q2 2008, I have a very reasonably priced bridge for sale in Brooklyn. Hardly used. Make an offer.

Henceforth, we shall rename the GDP deflator as the GDP Inflator, for that is what it does.


Goldman Sachs’ Jan Hatzius: Don’t Be Fooled by Inflation (August 2008)

Q2 GDP = 3.3% (kinda)  (August 2008)

Is BEA Measuring Growth or Inflation? (August 2008)

Sizing Up Sarah
Barron’s September 1, 2008

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  1. leftback commented on Aug 30

    Good job. We have a week of statistics coming out, all of which could easily be faked, I mean ADJUSTED – the birth/death adjustment will be heavily in evidence again on Friday in order to make the NFP number less than awful.

    You are too hard on Abelson sometimes, even though he is rarely first to a story (it is a print weekly).

    Here is the back story on the latest Friday bank failure; the amusement here is the name, Integrity Bank, and the fact they lent so heavily to a single developer. Now that says integrity right there.

    Speaking of Integrity, the deposits were rolled over to.. Regions ! To those who are truly desperate shall crumbs be given….

  2. Steve commented on Aug 30

    No reason to keep obsessing about this incredulous GDP number. The markets’ reaction to this (bond prices didn’t budige) makes it clear that nobody on the planet (except for Brian Wesbury) believes it.

  3. BG commented on Aug 30

    Normally, we blame this kind of stuff on the data. I think in this case, it is not really the data at all. The problem is the continual refusal to correctly interpret (~distort) the data.

    It is now becoming crystal clear that the actual data is much more believable than the interpretation of that data.

    They aggregate all of this data and want us to believe in their choice of assumptions that run totally contrary to their own admissions.

    These are well-paid government employees that pretend to be intelligent; yet they continue to destroy any credibility in their results, one report at a time.

    How do you think this crowd feels getting up every morning knowing their results are laughable (and of no real value)? It’s got to be tough, especially for the guy/gal who has any integrity and honesty in their reporting.

    They can also get that smirk off their face; because everyone with half a brain long since figured out what’s going on.

    You ain’t fooling no body dude!

  4. dblwyo commented on Aug 30

    Out of respect for the data and facts on the ground have you actually looked into the data and the measurements ? The GDP Deflator looks at all the goods and services that go into total economic activity while the consumer price index looks only at the basket that consumers buy. As it happens when you confront the data the Deflator is a reasonably accurate measure of what it’s supposed to be. But don’t take my word for but plow thru – it’s short but a tad technical – Menzies Chin’s dissection on Econbrowser:
    As it happens he covers a lot more ground on why it feels like a recession. And the preceding post by Jim Hamilton on Europe’s recession outlook is worth a read as well.
    But this meme should either go away or be treated correctly. Otherwise one is as guilty of spinning data as NAR.

  5. fudged_numbers commented on Aug 30

    I’ll stick w/ my original post:

    Is BEA Measuring Growth or Inflation?
    Thurs., Aug. 28, 2008:

    fudged ___? (fill in you favorite econ. stat acronym here: e.g.: CPI, GDP, NFP, etc.). Hey, it’s an election year…

    Good article at Bloomberg re:GDP vs. GDI:

    “…the income [GDI] and growth [GDP] figures should theoretically match…”

    Posted by: fudged_numbers | Aug 28, 2008 1:36:17 PM

    A 3.3% GDP number doesn’t reconcile w/ 2% FFR. Nor do the mkt./econ. fundamentals support it. You can fool some of the people some of the time…

  6. me commented on Aug 30

    I think a better explanation of what dblwyo said is available here, by Brian Wesbury:

    “Despite this, some analysts argue that Q2 data overestimated the true pace of real growth because the government underestimated inflation. This argument is bolstered by some very interesting developments in the GDP accounts, which show that nominal GDP grew at a very weak 3% annual rate in Q2 – 1.9% real GDP growth and a surprisingly low 1.1% inflation rate.

    The reason the government’s estimate of GDP inflation was so low was because of the way the data is calculated. GDP = Consumption + Investment + Gov’t Spending + Exports – (minus) Imports.

    So, the argument goes, the absurdly low 1.1% GDP inflation was just a technical artifact of the way the government calculates GDP. Deflating nominal GDP with a 4% inflation rate, calculated by including the 28% jump in import prices, would push Q2 real GDP into negative territory. For pessimists, this is an appealing argument.

    Fortunately, it’s not true. If import prices are added back into inflation, then the total dollar volume of imports must be added back into nominal GDP as well. This is the only way to compare apples to apples. Adding back imports pushes nominal GDP growth to 5.5% at an annual rate in Q2. Then, using the 4% inflation data (that includes import prices) means real GDP growth was still positive by 1.5%, or so.

    A second issue to think about is that unlike the Consumer Price Index (CPI) – which attempts to measure changes in the cost of the things we buy – GDP inflation is designed to measure changes in the prices of the things we produce, regardless of whether the purchasers are foreign or domestic. Due to oil, prices for the items Americans buy have been increasing much more rapidly than the items they produce. As a result, GDP inflation looks artificially low, when in reality it is not comparable to the CPI.”


    BR: This has to be one of the single dumbest arguments I have ever read about US GDP.

    To compensate for the ridiculous impact high imported oil prices have — artificially suppressing inflation — we should also include as part of our measure of domestic production the value of goods produced overseas? HOW ON EARTH DOES THAT MEASURE US PRODUCTION?

  7. Todd commented on Aug 30

    How convenient that such a bogus GDP number would be released just a couple months ahead of the election. Bushie, you’re doing a helluvajob.

    Obviously, the GOP do indeed think that the American people are so stupid as to fall for this kind of bullshit. But hey maybe they’re right; a lot of traders fell for it on Thursday.

    Just what does it say about our government that you can’t put any credence in any of the economic statistics it puts out? And, just what can you believe about our markets as well? Not much, which is one solid reason investors have essentially walked away from participating in the stock market.

  8. John commented on Aug 30

    What a bunch of whiners. Move along.

  9. larster commented on Aug 30

    I wonder how many competent number crunchers/forecasters are leaving the gov. due to what appears to be the giving of a number and telling them to back into it. You do not need much talent for that.

  10. Barry commented on Aug 30

    Note: This isn’t a grand conspiracy — this is simply the way the models are constructed. There are inherent biases built in, and this month’s GDP data reflects that.

    Yes, there is some latitude in making certain selections — I am not sure precisely how much — but I do not believe its huge.

    We have not a political issue here, but a quantitative analytical one . . .

  11. anon commented on Aug 30

    There are lots of reasons to question the data and its interpretation.

    But there’s a tendency to conflate somewhat different dimensions of the problem.

    E.g., some aspects frequently noted:

    a) CPI hedonic adjustments


    b) GDP “contra entries” e.g. imputed rent as output and income

    c) GDP financial sector profits, which probably exclude asset write-offs from underlying GDP income calculations


    d) The GDP/GDI differential


    e) The CPI/GDP deflator differential

    The last of these should be the least controversial if interpreted probably. Most of the difference between CPI and the deflator should be attributable to the exclusion of import inflation from the GDP deflator calculation. Import inflation is currently extreme. CPI inflation, although probably understated for many reasons discussed, is made higher than what would otherwise be the case because of import inflation.

    GDP includes only the valued added by the US economy in the further processing of imports. So the lower deflator number (leaving aside the other contentious CPI calculation issues noted above) means that the US economy is inflating in terms of total value added at a slower pace than imports per se (e.g. refining margins within the US inflating less than imported oil itself).

    It’s a messy subject, but it doesn’t really advance the case for CPI criticism by conflating that issue with what should be an understandable difference between the scope of CPI and the scope of the deflator. In particular, I don’t think it’s quite accurate to suggest that the deflator as an inflation measurement is the primary driver of understated inflation or overstated GDP. The other sources of the problem are closer to the truth of the problem, in my view.

  12. anon commented on Aug 30

    I agree Westbury’s “import adjusted GDP” is a back-asswards way of looking at the problem, resulting in an absurd concept for GDP.

    But the point he makes is that such an absurd GDP interpretation is in fact the logical consequence of what is an equally absurd inflation adjustment – which is to attempt to deflate GDP with the CPI.

    His final paragraph is more directly to the point, and is consistent with what I wrote above at 10:30.

  13. VoiceFromTheWilderness commented on Aug 30

    I have felt that the statistics coming from the government were being manipulated for a long time. Though I stand in the ‘unconvinced camp’ on conspiracy theories generally, it just seemed like anybody who would use the justice departement to manipulate an election, or control the scientific data coming out of NASA about weather, would not be above (nor insensitive to the possibility of) using economic data to further their political agenda. So I’m more than sympathetic to the point being made, and concurred with the interpretation of the graph you presented.

    However, in looking at it more carefully, as it has circulated round the blogospere, I notice an interesting feature: There is a *very* similar divergance between GDP deflator and CPI going into the 1980 recession. I just don’t think Carter had the out and out cynical manipulative gene enough to play shenanigans with government data for his own purposes. So… I have to wonder, is there something about the way these two numbers are calculated that creates this divergance going into serious recessions? Interestingly too, there is a reversed version of the disconnect with about the same magnitude in the middle of the 1981 recession.

    So… this could be completely ‘natural’, a consequence of how the numbers are calculated. And.. it could be recession indicator maybe of a long protracted one. Notice that there is a similar (but smaller) divergance going into the 1990 recession…

  14. VoiceFromTheWilderness commented on Aug 30

    PS: Note that my argument does not imply that the GDP number is true, correct, or accurate. It only is supportive of an argument that the error in the GDP number (which real world experience suggests is large) is not a manipulation but rather a consequence of some established process for calculating these two numbers.

  15. VennData commented on Aug 30

    To paraphrase a quip for the estimable Warren Buffett:

    Leave off your pants; we won’t let the tide go out.

  16. m3 commented on Aug 30

    i think dblwyo is right, you can’t compare GDP deflator and the CPI.

    the GDP deflator measures price changes of the products we make domestically, and the CPI measures prices of ALL products we buy as consumers(domestic AND imported)

    nevertheless, my hang-up is the logic in which these numbers are calculated because:

    1) it makes no sense to calculate domestic production in a country that produces nothing (except for snazzy credit derivatives worth about as much as a used gum wrapper)

    2) because of this, soaring imported oil causes the CPI to soar, but causes the GDP deflator to plunge; that’s the way economists have defined our economy.

    3) it’s straight out of orwell’s 1984, where the gov’t made up their own economic stats & formulas to tell everyone how great things are. these guys are straight from the Ministry of Plenty in the book.

    4) GDP largely measures things that are sold; whether or not it was done with borrowed money has no impact. this is especially important today since most of our borrowed dollars are imported, and as such should be subtracted from domestic GDP, as wesbury points out.

    5) i’m not sure why the PPI and the GDP deflator are different; you’d think they’d measure the same thing.

    ultimately, i think this goes back to the notion that economists have no clue as how to calculate inflation, or the money supply for that matter. (hedonics & geometric weighting are a whole other issue.)

    most of these formulas were derived at a time when the economies of the world were much simpler. i don’t know how valid they are with our incredibly complex, globalized, Frankenstein economy we have today.

  17. Henry commented on Aug 30

    VoiceFromTheWilderness above makes a very good point. I had also noticed that this same strange divergence happened going into the 1980 recession. The two periods are similar: Weak economy, inflationary environment, and major oil price spike.

    However, this sort of breaks down when you add in the 1973-74 recession. It had all these elements, but didn’t see the same divergence between CPI and GDP Deflator.

    It’s not necessarily true that the government statisticians and economists are cheating. It could be that they are too deep in the numbers and don’t stop to look at the big picture and realize that the results they’ve come up with make no sense. Anyone who works heavily with data sees such situations all the time.

  18. Stuart commented on Aug 30

    This post BR was out of the park. More and more it seems the economic data is transforming into political data. I read a while back to expect an all out “I don’t give a damn what they think” campaign on obfuscation and deferral. It seems more and more the intent is to kick the can down the road so it’s the next guy’s problem. As noted above, it’s extremely interesting and very telling that the bond market didn’t budge. When the bond market starts dismissing government data, Houston we’ve got a problem….a big one, for when government reporting loses credibility it takes a LONG time to earn it back… Too much debt and it seems it is in the Treasury Dept’s best interest to inflate it away.

  19. coler commented on Aug 30

    I’m no specialist in the field of economics, but I’d like BR to mull something over for me, being the specialist I know he is.

    A large number of U.S. residents (including every friend and relative I have living in the U.S.) seem to have a good chunk of their savings in 401k’s (I think that’s what they’re called?), which I believe are directly tied to the equity market somehow? Do most government and corporate employee’s have 401k’s as well?

    With such a large mass of people having a vested interest in equities, is there not some sort of a mass psychology at work here in painting a rosier picture of the data?

    I can’t imagine the vast number of number crunchers in government offices who are the first to see bleak economic numbers willfully allowing the data to pass through their hands without trying (even subconsciously) to enhance the positive aspects more than the negative, particularly if they realize that their future savings may hang in the balance.

    Has anyone done any credible research on this subject? What percentage of the population owns 401k’s? What percentage of government employee’s own 401k’s? What percentage of corporate employee’s own 401k’s? What fraction of 401k’s are tied to equities markets? Would a crash in the Dow, for example, result in a similar percentile crash in 401k’s?

    Is the mass ownership of 401k’s large enough to have a psychological effect on the data that is reported in the U.S.?

    Would independent analysts who are citizens of another country provide a less biased view of the health of the U.S. economy?

    I know… most of these are probably unanswerable. But it would certainly help explain (in my mind, anyway) how a consistent positive spin on negative data can dominate the U.S. reports.

  20. phil-las vegas commented on Aug 30


    May I suggest that we rename GDP from Gross Domestic Product to Grossly Deceitful and Pathetic?

    Just a thought.

  21. Stuart commented on Aug 30

    To explain the legitimacy of the GDP figure by rationalizing that the difference lies in how we measure “home grown” inflation ( per GDP deflator) versus “imported inflation” (as incl in CPI) completely, almost willfully dismisses recognition that services, which are almost entirely homegrown have experienced amongst the highest price increases. In essence then, Brian Wesbury’s POV that the US is generating home grown price inflation of 1.2% but the rest of the world is generating price inflation in excess of 4% would be the conclusion. To me it does make some sense that inflation sourced from abroad would be higher given the more accelerated growth of aggregate money supply in other countries, particularly OPEC and Asia, but to agree with this, one needs to think at his hard about services, for as stated above are largely home grown and prices for most are thru the roof. As accounted for just by this service component alone, home grown inflation is far higher than 1.2%.

  22. DL commented on Aug 30

    It’s interesting that so many government economists keep quiet about this issue. No doubt they risk being fired if they talk to the press on the record (without authorization). But it would seem that there would be at least a few who would want to talk to the press anonymously.

  23. Craig Mazeska commented on Aug 30

    Our governemnt has quickly become a sham over the past eight years. The average joe doesn’t realize how manipulated our data and markets have become. I hope a new administration will bring the much needed change our country desperately needs. I’ve almost lost hope, but I’m hanging on by a thread. The recent GDP scam is a slap in the face to anyone with half a brain and the ability to follow their silly inflation number…….The U.S. is in a perilious state ladies and gentleman……..Our lenders and government are insolvent and it’s getting worse as they try to (behind the scenes) to cure the ill’s of our financial instituations with the same methods that landed us in this disgusting mess…………

  24. Jim D commented on Aug 30

    That’s OK, noone believes the gov’t statistics from Argentina or China either. And according to Zimbabwe, inflation is contained.

    We are becoming a third world country.

    While the goons of the GOP have been responsible for more goodspeak than other previous folks, don’t expect this to get fixed if the Democrats come into power.

  25. Eric commented on Aug 30

    The short answer is that all the periods you have circled involve high oil prices.

    Since the US imports oil, the price and quantity go into all the GDP calculations as a negative. So, a rise in the price of imports goes into the deflator as a negative and brings the total deflator down.

    The other effect of the arithmetic is that the full effect of higher imported energy prices on the PCE happens with a lag. Once the imported oil is refined and the product moves up the GDP table from imports to Non Durable Goods consumption, the deflator for gasoline goes up and this is when it hits the PCE. The other problem this creates is that if you have period of rising import prices, the gain in period one goes into PCE in period two, but the effects of that can be masked by the further increase in import prices in period two.

    What you are seeing is the arithmetic of the deflator. The CPI is showing the effect of higher refined product prices. The deflator shows the effect of higher imported oil prices.

    This isnt manipulated or spun. Its merely not a very good model . . .

  26. Winston Munn commented on Aug 30

    Essentially, the U.S. has exported inflation by refusing to tax appropriately, and instead of printing more dollars has relied on borrowing from foreigners. This untaxed, uninflation allowed more spendable dollars to remain in U.S. circulation, which then went to consumption, which has fueled massive trade deficits, which has created inflation worlwide but not as much domestically.

    Regardless of the formula used, the truly revealing number has been hidden, and that number is the percentage of GDP that is left after adjusting for our debt.

  27. advsys commented on Aug 30

    I will buy that bridge. Full price. As long as you don’t mind me paying for half now with these triple A rated CDO’s that I have on hand and the rest over time in Zimbabwe dollars.

    Actually, in another couple of years we could probably switch that back to U.S. dollars. I won’t mind :)

  28. bdg123 commented on Aug 30

    Amazing that people would still use Wesbury to support their argument. Not only was he completely wrong before the market fell 85% in 2000, but he has been completely wrong to date while banks drop 85%. He may sound eloquent in his arguments, but reality is obviously different.

    It’s also amazing how many people want to blame Bush. I’m not fan of his politics, in fact I abhor much of them, but it is a generational belief system that has created this environment. One that has been building for decades. For that, “”you”” need to look in the mirror.

    But, the sun will rise again. And, the U.S. is going to come out of this a roaring tiger. That is, after it takes its wallops.

  29. cm commented on Aug 30

    m3: “domestic production in a country that produces nothing”

    That’s not a fair assessment. The US is big in agricultural production, aerospace (planes), chemicals, extractive (wood, mining), industrial equipment, and the “softer” categories of computer software and entertainment titles and financial/business services, a good chunk of which is exported. And I’m sure a bunch of other categories that don’t come to mind readily.

    With the “hard” categories less so and the “soft” categories more so, things become more murky with offshoring and local offices at remote clients — some of the stuff is produced by foreign workers, but under US management and under the US brand. Especially with services and labor that is to an extent geographically fungible.

  30. AGG commented on Aug 30

    “it’s a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.”
    Patriot Act
    No Child Left Behind
    Clear Skies Act
    You have to be brain dead to be unaware of the consistency of this government in naming things and doing things exactly opposite of the stated language.
    We don’t torture.
    In the 21st century sovereign borders are respected.
    Ownership society.
    Wealth creation.
    GET IT?
    If you don’t, just bend over and the government will explain it to you so that you really GET IT.

  31. dblwyo commented on Aug 30

    I almost hesitate to jump back into this but let me take another pass. The problem lies in the differences between what we make and what we buy – which is GDP vs something called Gross Domestic Purchases. Some time, many hours of data gathering/analysis and some chartsmanship resulted in this dissection and discussion of the consequences:
    Basically from 1929 to ~ Q207 the YoY% changes in those two was nearly the same but now they are divergent. GDP growth was 2.5% and 2.2% in the last two quarters while GDPurchases was 1.1% and 0.4%. Even more directly to the heart of all this sturm und drang is the pronounced, startling and historically unique scissors-blade spread between domestic GDP inflation and GDPurchases inflation. The former was 2.0% and falling while the latter was 3.5% and climbing rapidly. In other words we’ve been importing commodity-driven inflation and using our houses as collateral to borrow foreign funds (driving down the $) to buy more foreign goods than we sell in return.
    The BEA actually spent a lot of time thinking this thru and got it right. As some mild due diligence on the data would have shown. IMHO it’s more important to understand that we’re in a domestic growth recession and headed south, and that only trade is saving us so far and is also headed south. As opposed to conspiracy theories and missing the real story. You will of course decide which you find more amusing. :)
    However if you’re interested in the real consequences for investing and the economy the advantage likely lies with the real data.

  32. cm commented on Aug 30

    As for some newfangled service, consider the international Google ad and apps business. I’m not intimately with its mechanics, but this is surely one thing where at least the customer interface of the service delivery is heavily “localized”, but the technical infrastructure is mostly US-provided and US-managed.

    No matter how you want to “value” this (if at all), it certainly constitutes economic activity comparable to domestic media/ads.

  33. anon commented on Aug 30


    Two somewhat separable issues.

    First, import inflation is running at more than 20 per cent on $ 1.8 trillion. So the effect on translating CPI to the deflator will be significant. The greater the difference between CPI inflation and import inflation, the greater is the effect.

    Import inflation is running that high for 2 reasons that are relatively independent of what foreign inflation is running at – the global oil price, and the dollar.

    Second, services inflation should show up in both the CPI and the deflator, but presumably it is running at less than 20 per cent, however measured. If it doesn’t show up as one would expect, that really is a somewhat separate issue.

  34. Stuart commented on Aug 30

    Winston, good comments. Would be like a corporation only reporting their sales but failing to report that they had to take on $7 in additional debt to generate a single $1 in sales. How quickly we want to dismiss the other painful aspects of the country’s ledger.

  35. m3 commented on Aug 30


    That’s not a fair assessment. The US is big in agricultural production, aerospace (planes), chemicals, extractive (wood, mining), industrial equipment, and the “softer” categories of computer software and entertainment titles and financial/business services

    at least 70% of our economy is consumer spending.

    That means at *most* 30% of our economy is actual production, and a significant portion of that is banking & finance, which is mainly paper shuffling/fee collection, not actual production of goods.

    i agree that the US is a world leader in ag, but it’s a minor part of our economy. further, our industrial base had been sent overseas years ago. as for the banks, i’m not even going to talk about those clowns…

  36. anon commented on Aug 30

    BR –

    The implied characterization of Westbury’s intelligence was a bit unfair, given the validity of his point. He was merely constructing the hypothetical design of a GDP measure that would correspond logically to a CPI-deflated GDP. The original aberration lies in the idea of a CPI-deflated GDP, not in his “what-if” response to it.


    BR: I was referencing the argument, not Wesbury (who is a nice guy).

    But the argument — if you remove the artificial suppression of inflation via rising Oil prices, you should also include the production value of overseas manufactured items consumed here — remains utterly idiotic as far as gross DOMESTIC production is concerned.

    It is an obvious attempt to confuse a simple recognition of why GDP is misleading.

    * It may be idiotic, but it is apparently effective — it fooled you . . .

  37. bdg123 commented on Aug 30

    “At least 70% of our economy is consumer spending”………..NOT!

    If you capture business to business trade, which GDP does not, yet it captures government spending…….ie GDP is very misleading, the American economy is about $35 trillion. Consumer spending is 8 trillion.

    GDP is a measurement of output but it is not an accurate measurement of all trade in the economy. It captures consumer trade and that makes everyone believe all we do is spend. CM is exactly right. In fact, I could cite ten more major categories where American business is dominant.

  38. Stuart commented on Aug 30

    anon, I don’t disagree with what your last reply as it makes perfect sense that CPI measured inflation (as understated as it is) has to be alot higher given the amount we import of foreign generated inflation, a reflection of a much faster expansion of aggregate money supply in other countries. The amount of recycling into our treasuries alone is evidence of this. I think the debate is more centered on whether 1.2% an accurate reflection of domestically produced inflation. In my books, not possible.

  39. evening shade commented on Aug 30

    My first reaction to the GDP number is to run as fast as I could to a PC and put in a short order for 500 shares of AAPL.

  40. m3 commented on Aug 30


    we must be talking about 2 completely different things. i have no idea where you are getting your numbers from, but the american economy can’t be $35 trillion; GDP for the entire planet is only $65 trillion.

    US GDP is less than $14 trillion.

    further, the dominant sectors you speak of are weak as a percentage of GDP:

    “Production of goods accounted for 19.8 percent of GDP: manufacturing—such as computers, autos, aircraft, machinery—12.1 percent; construction, 4.9 percent; oil and gas drilling and other mining, 1.9 percent; agriculture, less than 1 percent.”

  41. Richard commented on Aug 30

    There is only one US dollar. There is not a separate dollar for exporters, importers and domestic industry. Once you define what you mean by “inflation”, you should get only one number, which somehow represents how the buying power of those US dollars has changed.

  42. Richard Kline commented on Aug 31

    Call it the GOP Escalator and we’ll be face to face with the ‘underhanded indicator’ here.

  43. cm commented on Aug 31

    m3 (and bdg123): I was merely disputing the statement that the US “doesn’t produce anything”.

    Aside from that, most economies are heavy in services, and valuing services is notoriously difficult as there is no physical manufacture that is readily counted. The more “developed” a society and the more price leverage the service sector gets, the larger its share of the overall economy. Furthermore, with less centralized control of the economy, economic relationships become more intermediated, creating the appearance (and arguably reality) of more transactions between different entities that were previously internal transactions (e.g. in a vertically integrated company).

    Having said that, everything left and right is being outsourced and offshored from “Western” nations, and the acclaim of “actual work” is ever declining in favor of “making an easy buck” (in part by taking middleman positions masquerading as a “service”).

  44. anon commented on Aug 31

    BR –

    I imagine Wesbury is a nice guy, judging from his CNBC appearances.

    I’m sorry, but he’s not making an argument to redefine GDP as you claim. If you read closely, you will see he explicitly did not do that. He only made the necessary adjustment to GDP that would be required in order to use a CPI type measure as the deflator with any sort of logical result.

    And removing imported oil prices is not “an artificial suppression of inflation” if you’re trying to measure GDP inflation.

    It’s not a question of being fooled. It’s a matter of understanding what he said.

  45. The Big Picture commented on Sep 1

    GDP Deflator Inflator !

    Final word on this subject (for now). As previously noted, we are no longer calling the GDP Deflator by that misleading name; untill such time as the BLS models more accurately reflect reality, it shall be known as the GD Inflator. Here is a visual dep…

  46. Francois commented on Sep 2

    “To compensate for the ridiculous impact high imported oil prices have — artificially suppressing inflation — we should also include as part of our measure of domestic production the value of goods produced overseas?”

    While were at it, can someone explain to this humble non-economist why is it that as food and energy get stripped from the “core” inflation (because it is sooo volatile, boohoo!) oil prices get factored in the GDP defla/infla-whatever?

  47. bdg123 commented on Sep 2

    I am getting my numbers from government statistics. Just not the ones that you understand. I didn’t say the U.S. GDP was $35 trillion.

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