Is GDP (via BEA) Measuring Growth or Inflation?

We noted earlier today that the Bureau of Economic Analysis reported revised Q2 GDP data at a better-than-expected annualized 3.3%.

As discussed in the comments, the measure of Inflation is crucial to getting an accurate read on GDP (or Durable Goods). Say  you live in a country that produced $100X worth of widgets in Year
1. In Year 2, it produced $110X worth of widgets. What was your GDP
gains? 10% ? 0% ? Or something in between?

If your inflation data is ~2%, then you can conclude that the bulk if those widget sales was growth.

Back to the US 2008 Q2 data: Here lies the gravamen of the issue. Part of the reason the GDP number looked so good was because the GDP price index for the second quarter was marked at just 1.2. In other words, BEA subtracted from nominal GDP 1.2% in order to produce their version of "real" (inflation-adjusted) GDP.

Mike Panzner sends along the chart below, along with these comments:

"Call me a skeptic, but based on the accompanying graph of the GDP inflation figure and headline CPI (which most people already believe is lower than reality), there seems to be something of a disconnect between the two (which would imply, of course, that U.S. economic growth is a lot lower than reported)."

That is precisely the issue at hand. The GDP Price index is even lower than the already laughable CPI inflation index.


Click for ginormous chartGdppricecpi

Chart courtesy of Michael Panzner


Take growth. remove inflation ex inflation. What’s left? I cannot even make up a term for the Frankesteinian mess that results.

But it sure as hell ain’t Real GDP . . .


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

Q2 GDP = 3.3% (kinda)  (August 2008)

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. wally commented on Aug 28

    It looks like a similar divergence before three prior recessions, too.

  2. Aurora Borealis commented on Aug 28

    That’s the way this central planning economy works.

    If Bernanke and Paulson wish for zero inflation they’ll be reported zero inflation.

  3. tyaresun commented on Aug 28

    The graph shows similar divergence between the two series before the 78, 88, and 98 recession bars? Is this a natural pattern, as opposed to doctored data? If yes, it still does not change the dire predictions.

  4. tyaresun commented on Aug 28

    The logical explanation for the divergence could be that the CPI is increasing but the GDP index is decreasing as producers reduce prices in light or recession related reduced demand. These price reductions show up in the CPI with a lag as shown by your graph.

  5. gaius marius commented on Aug 28

    br — i can make out qualitatively similar disparities in 1979, 1987, 1990, 1996, and 1999.

    overlay those years with a chart of YoY WTIC. i think the answer is there.

    the GDP price inflator doesn’t account for price hikes in oil imports.

    are we experiencing inflation? yes. but it is a result of import price increases. domestically, thanks to crashing credit availability, i think we’re actually experiencing something closer to a deflationary environment.

    i think we’ll get the real GDP results we’re “feeling” if the intensifying global slowdown results in a rising dolllar, lower oil and slowing overseas demand for american exports.

  6. Eric Davis commented on Aug 28

    Sure is quiet over here….

    I’m hoping we can start the global depression MEME…

    not like we take requests..

  7. ReturnFreeRisk commented on Aug 28

    gaius marius has it right. The oil price is in CPI. It is actually TAKEN OUT OF GDP. When they add exports minus imports, the tick up in oil price actually depresses GDP deflator.
    Voila! Big tick up in oil price = higher real GDP growth.
    Beautiful isn’t it?

  8. GB commented on Aug 28

    Maybe the lower demand drops input costs after a spike up of initial higher demand from a lower valued dollar. Just a thought I had.

  9. mickslam commented on Aug 28

    This is comical how low the defllator is right now.

    Is this current divergence between the inflation rate and GDP inflation 2nd highest on record? Looking back at the chart, it looks like the only time it was this far apart was right before the giant recessions of the early eighties.

    I fully agree with you Barry. We need to get a handle on this because without good information it is much harder to make good decisions.

    Note that if you use a reasonable rate of inflation for the last few decades, we haven’t had ANY economic growth. I don’t think this is about right, as my life is probably about 15% better than my dads was, but this is mostly due to technological progress. In terms of house, car, time, food, I am not that much better. Certainly not 100% better as real GDP/capita figures would have us believe.

  10. Terry commented on Aug 28

    I’ve been working the “real” GDP data a little this morning, I think the GDP number released this morning is WRONG USING BEA’S OWN APPROACH TO THAT CALCULATION.

    One way it reports the GDP data is through two tables that show (a) the change in GDP on a current and real basis (which is where the 3.3% number shows up for Q2) and (b) the actual estimated annualized GDP for the quarter on both a current and chained 2000 dollar (“real”) basis(put at $11.7T for Q2).

    I have compared these two sets of data and the results are amazing. I compared the STATED change in real SAAR GDP from the first table with the CALCULATED real AR GDP from the second for the 34 quarters from 1Q2000-2Q2008.

    For all quarters EXCEPT the last one (2Q2008), the difference between them is minuscule, averaging less than 5/1000 of a percentage point with no quarter showing a discrepancy of more than 5/100s percentage points. In short, they are virtually identical.

    Now, the 2Q2008 comparison shows an absurd difference of 1.41 percentage points. That’s the difference from the stated 3.3% growth in real GDP compared with the calculated change of 1.89% USING THE SAME OFFICIAL DOC/BEA DATA SET.

    I have no idea how the two numbers can be virtually identical for 33 quarters (and probably much, much longer) and suddenly explode to a difference of 1.41% in the most recent quarter.

    It’s either horrendous homework or fraud. Go figure!

  11. leftback commented on Aug 28

    Same arguments apply to the retail numbers. Retail sales looked fine for a bit because everyone was buying expensive gas for their cars.

    Now that inflationary component is being taken out, retail sales figures are going to be exposed.

  12. johnnyvee commented on Aug 28

    BR: Does this mean you lost your bet regarding recession?

  13. karen commented on Aug 28

    what if the treasury held an auction for $22 billion, 5 year notes and nobody came? keep an eye on rates today…

  14. Jake commented on Aug 28

    Terry:(11740.3/11646)^4-1 = 3.3%

    Not sure if you were looking at the old #’s…

  15. Concerned Citizen commented on Aug 28

    World markets are getting too big. With all the different news flows, it makes it too easy to put lip-stick on the financial pig.

  16. leftback commented on Aug 28


    If nobody wants the 5-year notes I will happily buy them all… although Bill Gross will beat me to it.

    People who are bearish on Treasuries should consider the fact that when we finally see the deflation beast is at the door and the bottom falls out of this thing, the only place people will want to be is out of stocks, junk and MBS and into – Treasuries.
    A look at JGB rates shows you where the path of deflation leads.

    What happens when we get there? That is I agree a question for debate.

  17. Francois commented on Aug 28

    “Voila! Big tick up in oil price = higher real GDP growth.
    Beautiful isn’t it?”

    I’ll bet you my universe we could find quite a few economists who would tell us with a straight face that GDP deflator and CPI ,as defined works well.

    Then, when asked how pertinent (you know, this thing about being practical and all that jazz) the resulting measure/calculations are, they’d look at us with a blank stare and an air of total incomprehension. I can already hear their reply:

    “But…pertinence has nothing to do with it”

  18. Jake commented on Aug 28


    My response to Jim’s post: I think James’ example is simple and his logic is easy to understand, but it isn’t necessarily applicable to the real world (or specifically to the U.S.). James’ story involves an Island which grows one good (a coconut, which it doesn’t “produce”) and imports oil.

    The U.S. does not have many “natural goods” like coconuts. Thus, we use that super-expensive imported oil as an input for our final goods. Thus, inflation has crept up as this expensive source of energy has flowed through the supply chain (YoY: energy up 70%+, PPI up 10%, CPI up 5%, Core CPI up 2.5-3%).

    A better example would have been coconuts and a fertilizer that is essential to grow coconuts. In this case had fertilizer doubled in price, I have feeling that $515.10 worth of coconuts would not have gotten you the 510 initially assumed by the Island’s BEA in the first round of its Real GDP calculation, but rather only 470 as the higher price of fertilizer increased the price of the final good, hurting demand. Thus, rather than an increase in GDP from 500 to 510 coconuts, there was a recession to 470 (same nominal GDP in both cases).

    At the end of the day, we need to look at the numbers and ask ourselves if they make sense and 1.1% does not. Should the GDP Deflator be as high as that implied by the CPI? Probably not, but somewhere in between would cause another revision to GDP, which was my point all along…

  19. karen commented on Aug 28

    dear leftback:

    buy all the certificates of confiscation that you want as the dollar becomes worth less and less every year. and don’t worry about bill gross beating you to it, cuz he’s losing big on his mbs and distressed debt purchases. btw, i loved your ship analogy in comments the other day. the way money is printed on this planet, i’m not worried about universal deflation, just figuring out where the next bubble is gonna be. oh, and as an aside, you probably noted that the $22 billion auction was not gobbled up…

  20. leftback commented on Aug 28


    I think that they are in fact nibbling on that 5-year supply right now (5-year at 3.04), the voracious gobbling will come later.

    Yes I do worry about reflationary nonsense, that’s what gold is for. But I believe that we will see all of this stuff play out sequentially, and right now all of the danger is in equities not bonds. I’m not sure if this is 1929, but it feels like it.

    Q: Did you really like my ocean liner analogy – or are you just taking the mickey? I did think it was a bit better than the bloke jumping out of a plane with no parachute…

  21. Jim D commented on Aug 28

    Remember that in addition to excluding import costs, the GDP deflator includes a lot of housing related stuff that they’ve deliberately excluded from the CPI.

    So, they’ve excluded inflationary things, and included deflationary things. Viola! A low deflator.

    So, as previously mentioned, this might be calculated correctly, but it’s not actually measuring anything that anyone intelligent should find useful.

  22. Aurora Borealis commented on Aug 28

    How much oil is produced _domestically_ in the USA? You can’t exclude the oil price change entirely by pointing at imports.

  23. karen commented on Aug 28

    leftbank, i had to look up your expression and am now glad to know it, thank you. no, i sincerely appreciated your analogy although i did like and learn from the terminal velocity one as well.

    i certainly agree with you on equities, but regrettfully did not sell my ultrashort etfs last week. i mistakenly thot the end was nigh and didn’t trade as usual… that’s what happens when you follow the news vs the charts. :)

  24. spork commented on Aug 28

    What I have learned over the past few years:

    Accurate data relies on errorless measurements and calculations.

    Truthful data relies on sound assumptions and methodology.

    In order to have confidence in a consistent and/or predictable outcome when contemplating a decision, the data used must be both accurate and truthful.

    Most likely, gov’t data/statistics (USA and foreign) are accurate but are not truthful. Just ignore them in the short run and exploit this for longer run trends.

  25. Scott in Chicago commented on Aug 28

    Our government doesn’t even bother with smoke and mirrors anymore. They just make shit up. No wonder we are a nation in decline with little prospect of turning it around.

  26. John Doe commented on Aug 28

    Hugo Chavez’s econ #s are more credible than the Bush Admin’s. Hah. I guess Philly was right, you Americans are in a “mental recession”….. I’ll have to remember that next time I’m buying one of your foreclosed homes from Dubai.

    $$$ Sheik

  27. Mark commented on Aug 28

    posted on Jim Sinclair’s site:

    Shakespeare on “Spin”

    I say,
    Confusion now hath made his masterpiece!
    And many think with brain as dry as the remainder biscuit after a voyage.
    Dull and muddy-mettled rascals,
    They speak unskilfully: or, if their knowledge be more,
    It is much darkened in their malice.

    Their sin�s not accidental, but a trade.
    If you take their advice,
    Truly thou art damned, like an ill-roasted egg, all on one side.

    Thou hath not so much brain as ear wax.
    Hast thou never an eye in thy head?
    Did they teach you how you should forget to think?
    There’s no more faith in thee than in a stewed prune.
    I took thee for thy better.

    Spin Doctors,
    Out of my sight! Thou dost infect my eyes.
    Your means are very slender, and your waste is great.
    There’s no room for faith, truth, nor honesty in this bosom of yours. Sense sure you have, else could you not have motion; but sure that sense is apoplex’d.
    Thou art pigeon-liver’d and lack gall.
    Draw your necks out of your collars. And stop speaking an infinite deal of nothing.

    Your bait of falsehoods take this carp of truth:
    Thou art so leaky that we must leave thee to thy sinking. No word to save thee. Canst thou believe your living is a life, so stinkingly depending? Go mend, go mend.
    Assume a virtue if you have it not.

    Peace, ye fat guts!
    Peace, good pintpot, peace, good tickle-brain.
    I will most humbly take my leave of you.

    (With thanks for inspiration from The Bard � Hamlet, Henry IV, Measure for Measure, As You Like It. Assembled by CIGA Annette)

  28. DL commented on Aug 28

    It’s no surprise that the government would try to fool the average Joe, and largely succeed in doing so.

    What is somewhat surprising is that the bond market, the currency markets and the gold market would be fooled to a certain extent as well.

  29. Stuart commented on Aug 28

    “Thou hath not so much brain as ear wax”

    Now THAT would be an insult….

    Certain headline writers must have very large ear canals to fabricate that much ear wax… lol

  30. leftback commented on Aug 28


    If you liked “taking the mickey” you would love this one: “you must be pulling my plonker”.

    Painful squeeze today, I had a sixth sense that it was coming and covered first thing. Back short now.

    I can never bring myself to stay in SKF for long – it’s not a level playing field and besides, the other team cheats. Good luck.

  31. Stefan Karlsson commented on Aug 28

    There is no mystery to this disconnect. It is related to the false methodology of BEA to consider a deterioration of terms of trade to be irrelevant when determining the real value of domestic production. More about this and why the methodology is false see here.

  32. Geert Noels commented on Aug 28

    Today the news titles should read like “Stocks soar on lies”

  33. bluestatedon commented on Aug 28

    CPI, GDP, BEA, NFP… the most relevant acronym in discussing the government figures is GOP.

    McCain, his partners at FoxNews, and the rest of his adoring media friends will be trumpeting the alleged growing economy at the top of their lungs for the next two months, and J6P, declining to use any other source of information, will shrug, disbelieve his own eyes, and figure things are generally fine. This will be enough to give McCain the victory in November.

    Said victory will be the very definition of “pyrrhic.”

  34. Popo commented on Aug 28

    I think the term you’re looking for is “Soviet style”. The captains of free market capitalism are abandoning every one of their principles to save themselves. And they will continue to do so until publicly humiliated for their duplicity, dishonesty and abuse of power.

  35. AGG commented on Aug 28

    GDP surprise is just, as noted above, more government lies. And no, I don’t think the average Joe believes this crap. The brokers are buying with borrowed money from the fed. It’s a scam that taxpayers are being set up to pay for when (not if) the market really tanks. Sell into this rally. Get far, far away from this market. This is the blow off.

  36. VJ commented on Aug 28

    George Orwell would be in awe.

  37. ScottB commented on Aug 28

    When I have taught economics, I have discussed with my students how real GDP can go up without it benefiting the average person. The preliminary numbers appear to be saying just that: the real value of domestic production went up (thanks to a jump in exports, and the rebate) while living standards dropped (stagnant wages, higher import prices). Prices on some domestic goods like cars dropped.

  38. Winston Munn commented on Aug 28

    George Orwell was a prophet – who’da thunk it?

  39. Pat G. commented on Aug 28

    I don’t see a mention about the stimulus checks on here and how they distorted the GDP number.

  40. rootless cosmopolitan commented on Aug 29

    “That is precisely the issue at hand. The GDP Price index is even lower than the already laughable CPI inflation index.”

    There is a logical explanation for that. The CPI inflation index contains import inflation, but the GDP price index doesn’t. Imports are not part of the GDP, thus inflation of import prices has to be excluded from the GDP price index also. If price inflation of imported goods is higher than price inflation of domestic stuff, and I think it has been significantly, recently, then the GDP price index will have to be lower then the CPI inflation index.


  41. Campbeln commented on Aug 29

    > George Orwell was a prophet – who’da thunk it?

    Orwell, for one.

  42. gordon commented on Aug 29

    TODAY’S REPORT SHOWS GDP was a FRAUD! (overstated by 1.9%, was it POLITICALLY-GOOSED???

    Incomes Slide

    Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates. That was after a 0.1 percent gain the prior month, today’s report showed. The median forecast was a decline of 0.2 percent.

    The report’s price gauge tied to spending patterns jumped 4.5 percent from July 2007, the biggest 12-month gain since 1991.

    The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent for a second month. The so-called core price measure was up 2.4 percent from a year before, the most since February 2007.

    Adjusted for inflation, spending plunged 0.4 percent, the biggest drop in four years. Price-adjusted purchases of durable goods, such as autos, furniture, and other long-lasting items, dropped 1.6 percent. Spending on non-durable goods decreased 0.9 percent, and services, which account for almost 60 percent of all outlays, were unchanged.

Posted Under