GDP fails ‘commonsense sniff test’

At the Columbia School of Journalism yesterday, a large part of our discussion was on how the media should report and interpret economic data. We used GDP and Inflation as the classic example.

By coincidence, the AP had this very astute article on Q2 GDP yesterday afternoon:

"It was a rare bit of stellar economic news. The Commerce Department revised Gross Domestic Product upward last month, saying the broad measure of the economy grew at an annual rate of 3.3 percent for the second quarter, up from an initial estimate of 1.9%.

One problem: A vocal group of analysts and economists isn’t buying it. "Quite frankly, we do not think the report passes the economic commonsense sniff test," wrote economists John Ryding and Conrad DeQuadros at RDQ Economics.

GDP measures the market value of everything produced by labor, plants and properties in the U.S. a total of $14.3 trillion for the second quarter. The government agency charged with calculating the first estimate of each quarter’s GDP has less time to do so than a ten-branch bank has to file an earnings report . . .

Criticisms of second-quarter GDP were more granular. Disbelievers say it was skewed by some of the conventions that make it consistent from one quarter to the next and strip out foreign inflation . . .

Then, there’s the inflation picture. To calculate growth, the government tries to strip out the illusion of growth that comes with higher prices. Nominal GDP, which includes inflation, can look great; but strip out that inflation and the picture can change markedly.

To strip inflation out of the data, the government devises a "deflator" that subtracts inflation from nominal GDP. In the second quarter, that deflator was 1.3, a figure that was half what it was in the first quarter and tied with a 10-year low. Starting with nominal GDP of 4.6 and subtracting that 1.3 deflator, we get real GDP of 3.3.

If the government had used the same deflator as it did for the first quarter, 2.6, GDP would have only been 2.0.

Consumer inflation for July was the fastest it had been in a generation, moving up at a rate of 5 percent for the previous 12 months. Had the deflator been that large, we would have seen negative growth for the second quarter."  (emphasis added)

Normally, we at TBP are months ahead of the MSM. If they are only a few weeks behind, that is a huge improvement.


Q2 GDP = 3.3% (kinda)   August 28, 2008

Is GDP (via BEA) Measuring Growth or Inflation?   August 28, 2008

Critics: GDP fails ‘commonsense sniff test’
AP, 3:45 p.m. ET, Tues., Sept. 9, 2008

Real GDP? Maybe not, critics say
Associated Press, September 8, 2008

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What's been said:

Discussions found on the web:
  1. Vermont Trader commented on Sep 10

    LEH looks crappy but as expected…

    Interesting how the rise in dilluted shares over last qtr effect loss per share. would have been $7.31 using last qtr dilluted EPS.

    No resolution on anything so looks like we are in for another quarter of endless torture of LEH rumors.

    Lots of other stocks very oversold here so maybe we can move on for now?

  2. Paul Jones commented on Sep 10

    I’ll be more forthright: a cabal of neocons is lying in order to hang on to power.

    I reject the idea that these are innocent oversights. Nothing is innocent with these people.

  3. Uncle Paul commented on Sep 10

    I was watching Fiox Business News at 6:45 this morning and choked on my cereal when Dick Bove told the host that people should buy Lehman. Is this guy for real??? LEH is already down 10 percent in pre-market. This guy has absolutely zero credibility-first he said two weeks ago that LEH had three days to do a deal-nothing. Then he says last night that US Gov’t would step in-nothing again. Why does everyone keep having this idiot on and why is he never challenged on his consistent BAD calls??

  4. Debbie R commented on Sep 10

    Who wants to chip in to send a copy of Humpty Dumpty to Dick Fuld?? Bueller?? Bueller??

  5. Viv commented on Sep 10

    Wow, lehman just slashed it’s dividend 93%, a real slash and burn. A mark to market loss of 7.8 billion! Wanna bet that thats understated? Cleaning house though they maybe, the clock still tick tocks for lehman. Its in a death spiral at this point.

  6. Andy Tabbo commented on Sep 10


    I think this is signal that the public consciousness is coming around to the full bearish view. The closer the MSM gets to embracing the full blown bearish implications of all the information, the closer we get to the big dumperoo…which is coming.

    – AT

  7. Winston Smith commented on Sep 10

    “Quite frankly, we do not think the report passes the economic commonsense sniff test,”

    Very likely no boots had been produced at all.

  8. leftback commented on Sep 10

    I had to employ the sniff test myself this morning…

    Well, the world never ended on a Wednesday but I think AT is right, the big dumperoo is coming, but it will require some viral transmission of the relevant information from the blogs to Joe Public, as MSM doesn’t seem to want to be bearer of bad news.

    The $ is going to stall soon, Treasuries will stall once people realize how much supply is needed for the Fannie mess, and then we’ll be in a whole new ball game.

    Long oil companies and gold miners, short retailers for now. I am probably early with this but too many people were jumping on the D train, so we may be due for a turnaround.

  9. Sing Expat commented on Sep 10

    Awww, it’s so cute when people get all riled up about goverment lies. GDP deflator is wrong? It’s a lie? Is that it?

    Invading Iraq using fabricated evidence and outright lies.

    Bombing civilians in Afghanistan repeatedly and denying it.

    Lying about kidnapping, imprisoning and torturing innocent civilians.

    Lying about unconstitutional wiretaps.

    Lying about financial ties to companies getting rich on the government no-bid trough.

    Etc., etc., etc.

    And people are still amazed by the GDP numbers.

    Try this. Use an income deflator when you file your taxes. Drop your income by 50% based on hedonics. See how that flies with the IRS.

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