Taking a Closer look at Other 3+% GDPs

Over the years, I have criticized a variety of official data points as misleading: Consumer Price Index (CPI) for woefully understating price increases, Non Farm Payrolls (NFP) due to the Birth/Death Adjustment, Core Inflation for omitting anything going up in price (aka inflation ex inflation), The Unemployment Rate due to the shrinking labor pool, and GDP due to the excesses of the deflator.

All of these data series have something in common: They all have had gradual changes in their methodologies over time. These incremental improvements in modeling, data gathering and analysis have slowly altered the various econometric models that are used to produce the official numbers: NFP, GDP, CPI, etc.

My main criticism has been that many of these changes have been for the worse. If we define any model as a mathematical attempt to portray reality, than anything that takes us away from reality is a negative. Any modeling change whose output generates further variance from the ideal construct worsens the veracity of the model.

Stated differently, do the changes improve the official data, or do they create an artificial world that does not resemble the one we live in?

Over these many years of critique and criticism, I have noticed two interesting factors:

1) The tendency for many Wall Street and academic economists to ‘circle the wagons’ around their chosen profession (i.e., blindly defend standard precepts). Hey, if you are going to go through the trouble of getting a doctorate in something, you probably don’t want to hear how flawed many of its basic assumptions and/or methodologies are.

2) The false counter-arguments, strawmen, and phony debates. There is no faster way to admit the weakness of your argument than to claim that credible criticism is merely a tinfoil hat conspiracy theorists. (A variation of "When the Law and Facts go against you, call the other lawyer a jerk" approach).

Good debate, on the other hand, makes your analysis better — it sends you back to the data, forces you to look at things in different ways, and sharpens your arguments. Indeed, good arguments should help lead to their own defeat in the marketplace of ideas, as they bring about even better critiques. (See David Altig’s spirited defense of the Deflator here).

Which leads us to taking one last look at the revised Q2 GDP data, showing the economy expanded at an annual rate of 3.3%.

My argument, repeated ad nauseum — see "Previously" below — was that number misrepresented what was occurring in the real world economy, primarily due to the high price of imported oil oddly inflating GDP. This certainly doesn’t feel like a 3.3% GDP, but rather than go on gut feel, I wondered what other periods of expansion looked like in terms of economic data. If I am going to trash the deflator, I want a more quantitative basis for doing so.

Our question: Does this 3.3% GDP resemble in most economic data points other, similar economic expansions? Or, is this GDP data, as we have argued, merely the result of a modeling flaw?

With the help of Mike Panzner (Financial Armegeddon), we looked at other periods of time when GDP was similar to the Q2 3.3% — we used any quarter where GDP was between 3.0 – 3.5% as our range. Going back to 1959 (that’s all the data available) there were 12 quarters (6.1% of the total) where GDP was greater than 3.0% and less than 3.5%. We then looked at the median Unemployment Rate, NFP (trailing 12 month change), ISM Manufacturing, CPI, PPI, Industrial Production, New Housing Starts, and Consumer Confidence.

What were the results? Consider the following: As you can see in the table below, much of the contemporary data is quite simply incongruous with an annual growth rate of 3.3% GDP.

In the past, a 3.3% GDP produced significant growth throughout the
economy. Millions of job gains over the prior year versus less than
50,000; robust Industrial production versus essentially flat; Low
inflation against high; Expanding ISM versus contracting; Producer
prices were stable versus extremely elevated; Average home starts were
50% higher. And consumer confidence was more than double where it is


Comparing Current Economic Conditions With the Past: Prior Expansions of 3.0-3.5% GDP

Economic Data Point Q2 Latest value Median prior 12 months
Chained 2000 Dollars QoQ SAAR
Unemployment Rate
Total in Labor Force SA
5.50% 5.70% 5.20%
Nonfarm Payrolls
Total Net Change SA From Year Ago 
41,000  -67,000 2,570,500
ISM Manufacturing
50.2 49.9 53.1

Urban Consumers YoY NSA
5.00% 5.60% 2.90%

Finished Goods Total YoY NSA
9.20% 9.80% 1.70%
Industrial Production

YoY 2002=100 SA
0.20% -0.10% 4.60%
New Home Starts

Privately Owned Housing Units Started Total SAAR
1,084,000 965,000 1,483,000
Consumer Confidence

Conference Board SA 1985=100*
51  56.9 115.15 

Q1 1959 – Q1 2008 = 197 quarters There were 12 quarters (6.1% of the total) over that span where GDP was greater than 3.0% and less than 3.5%.  Note: where data is generated monthly, the value given is for the last month of the relevant quarter (*Only 10 quarters of data; series began Q1 1967).


Yes, high Oil prices contributed to the revised Q2 GDP data. No, this is not a "Goldilocks economy." The bottom line is that if this is a legitimate 3+% GDP, it is one of the worst economies ever to generate that data point since the US began recording its economic history.

Regardless of how we manage to generate a 3.3% GDP number, the table above makes it pretty clear: This is not your father’s 3.3% economy.


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

What Conspiracy? (June 2008)

GDP Deflator Inflator ! (September 2008)

GDP Deflator versus CPI (August 2008)   

GDP: Lowest Inflation Rate in 5 Years (August 2008)

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What's been said:

Discussions found on the web:
  1. JimmyY commented on Sep 4

    Hello Barry:

    Have you noticed….

    Per the U.S. DoL’s 8/21 initial claims release:

    “States reported 1,284,252 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Aug. 2, an increase of 570,284 from the prior week.”

    I looked at initial claims news releases prior to 8/21 and could NOT find any reference to the “570k prior week” statistic.

    The 8/28 initial claims are worse:

    “States reported 980,695 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Aug. 9, a decrease of 313,633 from the prior week.”

    Unfortunately, the 8/21 EUC numbers were revised +10k within the 8/28 report.

    More analysis from Mike Donnelly:


    Looks like the employment picture (or lack thereof) seems very ominous.

  2. C. Fischer commented on Sep 4


    Isn’t this actually worse than this since a lot of these statistics have been redefined over time to paint a rosier picture? (a 5% unemployment rate in 1960 is NOT the same as a 5% unemployment rate now..)

  3. Bruce commented on Sep 4

    Big jump in claims…444k…

    Rosy Scenario just left on the Greyhound…says she won’t be coming back…

    Bruce in Tennessee

  4. SJac commented on Sep 4

    In a growing economy we shouldn’t be loosing jobs. Can any one answer why we have +ve GDP and -ve job growth?.

  5. Winston Munn commented on Sep 4

    “Can any one answer why we have +ve GDP and -ve job growth?.”

    It’s simple, really. One must simply have sufficient faith. Like this:

    “WASHINGTON – (KRT) – President Bush waded into the debate over evolution and “intelligent design” Monday, saying schools should teach both theories on the creation and complexity of life.”

    Anyone who believes Creationism should be taught in schools can hardly fault Creationism in GDP, now can they?

  6. Stuart commented on Sep 4

    4.3% productivity??????? Relatively speaking, now even fewer working to produce fewer items. Baffle with BS.

  7. Wisdom-seeker commented on Sep 4

    The productivity number is inflated by the bogus GDP number.

  8. Davey Crockett commented on Sep 4


    Kudos for offering another viewpoint to be included in your commentary. I have no skin in this game, but think that it would be very interesting to have a guest commentator provide a reasoned rebuttal to your thoughts. I, of course, would expect you to reply back. Possible?

  9. Greg0658 commented on Sep 4

    graven images like graven ideas are difficult to shuck/shrug/shun

  10. JimmyY commented on Sep 4

    What’s going on with the DoL? Per their latest initial claims report today:

    “States reported 1,394,749 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Aug. 16, a decrease of 384,050 from the prior week.”

    However, if you look at the tables within the report… EUC for w/e Aug 16 was an INCREASE of 384,050 from the prior week!

    Things that make you go hmmmmm…

  11. Victor Wang commented on Sep 4

    here is some interesting news

    CHINA”S containers shipment to US fell 21% in June, the biggest drop since 1995, after US consumers cut back on buying back on buying sprees. In Jun US received 654966 boxes from China, according to Japan Maritime Center. Also Asian-US container shipments fell -18% to 1.03 mln boxes.

  12. Sean commented on Sep 4

    Barry, your hard work on dismantling the data and making an objective comparison, is greatly appreciated.

    You are the gold standard to beat in the blogsphere as well as objective economy analysis!

  13. Bruce commented on Sep 4

    Sorry Barry, you are right…delete my previous…my mother and dad raised a smartass part of the time.

    Bruce in Tennessee

  14. Josh commented on Sep 4

    Terrific post Barry.

  15. Stuart commented on Sep 4

    And as a result, China is pulling back on the pace of their currency appreciation and buying the US dollar to defend its exports. This is prompting US voices of disgruntlement. It’s clear no one wants an expensive currency as it seems everyone’s plan is to export their way out of the slow down. Competitive currency debasement is here. Lets see how exports “help” the GDP calc in Q3 now that the dollar is gaining strength.

  16. Ed Miller commented on Sep 4

    I stand by my statement that changing the measurements makes comparison with other time periods meaningless and invalid. Even if you believe they are refinements, the result is still moving the goalposts.

    In fact, all the changes are made to make the numbers look better so the ruling class looks better.

  17. Edward Charles Ponzi Jr commented on Sep 4

    No, this is not a “Goldilocks economy.”

    ??? Really? ever read the book:

    Just then, Goldilocks woke up and saw the three bears. She screamed, “Help!” And she jumped up and ran out of the room. Goldilocks ran down the stairs, opened the door, and ran away into the forest. And she never returned to the home of the three bears.

  18. jg commented on Sep 4

    Excellent analysis, Barry and Michael.

  19. Jeff M. commented on Sep 4

    Time to test the July 15th “bottom”, as Cramer called it. When is his next rant blaming someone ELSE for his failures? I say the over/under is 10 days. What say ye?

  20. jerry bright commented on Sep 4

    i dont believe it…..cnbc’s erin burnett just called sarah palin a “milf”

  21. Walker commented on Sep 4

    I know you are not doing this seriously Barry, but comparing government numbers now to government numbers in the past is a pet peeve of mine (in fact, you are illustrating the folly of such). If another pundit says that CPI inflation is much lower than it was in the 80s, I am going to reach through the TV and strangle them.

    Numerically comparing two different types of measurements is mathematical illiteracy. According to these idiots, 20 inches is longer than a mile because 20 > 1.

  22. Jeff M. commented on Sep 4

    Brilliant piece, BR. Your site continues to be my favorite, by far. Why can’t we get more of this kind of honest analysis in the MSM? Do people want to know the truth anymore?

  23. Mike in NOLa commented on Sep 4

    Hate to get off topic here, but Erin just showed tremendous insight after her idiotic bottom-calling earlier this morning.

    Donny Deutsch was just on CNBC saying what a great product Palin is to market: smart, sexy, feisty, etc. Erin chimed in that what he was saying brought to mind a four letter acronym beginning with m and ending with f. I think she nailed it :)

    As to the current post from BR, he has nailed it. He’s just not as sexy as Erin

  24. Scorpio commented on Sep 4

    and now we’re moving back below the SPY moving average. upcoming date Sept 30 looking ominous to me: 1) FNM, FRE rolling over $250 B, 2) banks rolling over >$100 B medium term notes, 3) deadline for investors to notify hedgies they want out by yr end

  25. km4 commented on Sep 4

    OT: Cindy McCain’s $300,000 Outfit

    One of the persistent memes in the Republican line of attack against Barack Obama is the notion that he is an elitist, whereas the G.O.P. represent real working Americans like Levi “F-in’ Redneck” Johnston.

    Wow! No wonder McCain has so many houses: his wife has the price of a Scottsdale split-level hanging from her ears.

    This outfit which made her look like some kind of banana dominatrix was the worst outfit I have seen since the 1970s or since Star Wars! Do these people not have a mirror to look into before they go out into public? Course, maybe I just do not appreciate true fashion!
    Posted 9/4/2008 by arlonadkinson

  26. DL commented on Sep 4

    Certainly, the payroll data we’ve been seeing is not consistent with 3% GDP growth. And, as discussed previously on TBP, the conversion from nominal GDP to “real” GDP is based on unrealistic inflation parameters.

    But is this overstatement of GDP growth due SOLELY to an understatement of inflation? And if not, what would be the motivation of government officials to adopt a model that consistently overstates the GDP growth rate?

  27. h in boston commented on Sep 4

    Superb post. That anyone wth a phd in economics should be suspicious of these gov statistics is clear. To be fair, many of the more serious (academic types?) have expressed doubt. But why is the disjunction between independent professional opinion (and I know you suggest otherwise, with the “circling of wagons”) and statistical bureaus never an item for the mainstream press, like the NYT?
    When the market floats vertiginously on days of impending crises (and short positons hurt) I find myself wondering if it is truly possible to avoid implosions by pretending or deceiving oneself that there isn’t a problem, via false credit ratings, false growth statistics, and the like. Perhaps like a cancer patient with an extraordinary optimism–sometimes ebullience brings miracle cures. I would have thought the economy was a matter for scientific attitudes, irrespective of human views (feelings) of crisis and difficulty–but the feelings seem to play a greater role than I ever imagined.

    Does this wild American hedonia lead to a that-much-harder fall in the end, or a cushion of it? I tend to think the former, but I’m never sure. Just surprised I’m not sure…

    Excellent post, BR.

  28. GuinnessFan commented on Sep 4

    Barry, in the spirit of the season’s political BS (and the storyline you won’t see on Kudlow)…..is today the Sarah Palin selloff?

  29. h in boston commented on Sep 4

    In response to Walker:

    I understand what you write, but I’m having trouble following your intention in making it.

    It is true, I think, that comparing two different kinds of data–since they were formed under different methods and cannot be interpreted in like ways–is a kind of mathematical illiteracy. But the point is that creating such data under constantly changing parameters, when the goal is

    to create data for the sake of comparison (that’s what statistics are for)

    is also mathematically illiterate. The point was to show that these statistics have much less utility than imagined because of this.

    Maybe I misunderstood your post–I think you’re being critical of Barry, but maybe just the opposite.

  30. Mike M commented on Sep 4

    Barry, this is Phil Gramm: Quit Whining!

  31. anon commented on Sep 4

    It should be evident now that your argument, repeated ad nauseum (your description), has been rebuked by a number of reputable blogging economists. It’s also quite clear from some of your words here, directed at that profession, that you have little respect for their views. You seem to conflate their professionalism with an absence of the kind of imagination and creativity that you are blessed with.

    I think you are still overlooking the basic algebra of the GDP components as defined. (Algebra having to do with logical relationships among a system of variables).
    This is causing you to make the same mistake, ad nauseum.

    The high price of oil doesn’t “deflate GDP”. Imported oil is not included in GDP, which is value added separate from imports. Domestic margins are separate from the cost of imported inputs. It’s the low inflation rate on domestic margins that contributes to a low deflator.

    Domestic margins are a function of final product pricing and the cost of imports. But once final pricing is set, domestic margins are set and are distinct and separate from the cost of inputs such as oil. The deflator measures margin inflation. It has nothing to do with oil inflation.

    Your statistical analysis is potentially interesting in its own right, but a reach in terms of responding to the core issue of understanding these economic 101 relationships.

  32. Eric commented on Sep 4

    It’s all the Fed’s fault. If they had simply started cutting interest rates a few months earlier last year, then we wouldn’t be in this mess. And now Europe is making the same mistake. (wink wink)

  33. anon commented on Sep 4

    I meant “inflate GDP” above.

  34. anon commented on Sep 4

    You are obviously powerhouse blogger with an enormous following and a wealth of insight into the markets and the world.

    You might consider just holding back once in a while and admitting that you might be in error on a particular point.

    I’ve never know anybody who grew without admitting they were wrong from time to time.

    This particular point has very little to do with a number of the other observations you make about data shortcomings, many of which may well be legitimate. In fact, this point has nothing to do with data. It’s just economics 101.

  35. equtz commented on Sep 4

    And now the legitimacy of the energy numbers are begining to come under scrutiny. A complete crisis in confidence awaits.

  36. leftback commented on Sep 4


    I think you have nailed it. Your table provides independent evidence that the GDP number is, in a word, bogus.

    In science and engineering, as in economics, one often has to report a data series that can have two sources of error:

    the first is random noise due to statistical variation, which becomes relatively more important when the sample size is small (this is why we shouldn’t take much notice of the week-to-week wobbles in initial claims, for example). of course the random error varies in size, can be of either sign and if you could measure it over time, the mean would be zero.

    the second is a systematic error that often results from the measuring instruments or the data handling methods. the systematic error is invariably directional, i.e. it has a sign, and is constant over time, so that if it was measured, the mean would be finite.

    you have correctly identified a systematic error that will remain in the data over time, inevitably pulling the GDP lower in future quarters as inflation (as measured by CPI) declines. You don’t need a PhD in economics to see this, just a clear mind.

  37. anon commented on Sep 4

    the end

    (for Q2)


  38. Tom commented on Sep 4

    With all the off-shoring,out-sourcing, etc., I wonder if we have created an economy that can grow with no job creation and no wage expansion for those who have jobs?

    A complete decoupling of economic benefit between business and the people. What is good for business is no longer what is good for the people.

    How long will this last in a democracy? Unless the business elites have a plan for a coup de tete?

  39. leftback commented on Sep 4

    Manhattan guy said:

    CFTC probing false oil inventory reports: report


    I am shocked, shocked, that those involved in the oil markets may not have been telling the truth… what a stunning revelation.

    Seriously, when Krugman was writing all that tosh in the NYT about how there were no specs involved in the oil bubb.., I mean market, you could hear the laughter all the way from Greenwich. I am telling you, everyone on MetroNorth between Stamford and Grand Central knew that the oil market was being juiced. On the other hand, a very profitable short trade has resulted.

    Bubbles always have the same dynamics, kids. Look and learn.

  40. Bruce commented on Sep 4

    Well, the MSM just doesn’t seem to get it…this headline “Stict Lending Standards Contribute to Housing Woes”


    …has it what would be called in my childhood “ass-backwards”..

    The (NOW) strict lending standards didn’t contribute to anything…it was the lack of strict lending standards that was the disease…it is the same as saying the antibiotic caused the problem, not the illness…sheesh…MSM

    Bruce in Tennessee

  41. Andy Tabbo commented on Sep 4

    Congrats on this post Barry. It very much undresses anyone who was using that 3.3% GDP as a bullish sign.

    Also, you (and your posters) nailed the whole “Oil is dropping so it’s good for stocks” meme that was so pervasive a few weeks ago. We knew it was a signal of global economic slowdown. I even made the point then that a commodity breakdown was a prerequisite before a full breakdown/capitulation of the stock market could occur.

    1243 – 1225 zone on SP500 is a very important level to hold. A decisive break of 1225 should be a cue to start selling all stocks immediately.

    – AT

  42. Jordi commented on Sep 4


    there is actually not too much critizism about GDP since Kuznets developed it. But you are right, it does not capture
    1. malinvestment
    2. externalities
    3. sustainablity

    and it’s easy to be mislead by GDP. In case of the current one the “less than expected” shrinking of inventories (stuff produced but not sold) made it look positive.
    In case consumers go on strike, then this assets deplete.

    Alternatively I have tried to come up with something I call “efficient GDP” and it allows for better comparison of data. I’ll posted some charts for Spain on blog.berninger.de and will come up with some nice charts for the US as well.


  43. leftback commented on Sep 4

    AT –

    Spot on as usual with the technicals, and we are knocking on the door – 1235 already.

    XLF 20 is also going to be critical, tomorrow or next week, if the banks do not hold there, we might see the trapdoor open.

    The refi issues are a lot more serious than many people wanted to admit, and this will become more obvious as September 30 approaches and certain institutions fail to rollover debt. Wonder when we are going to hear about new stock issuance?

    Beware dilution, abandon hope, all ye who enter….

  44. Walker commented on Sep 4

    Maybe I misunderstood your post–I think you’re being critical of Barry, but maybe just the opposite.

    I am not being critical of Barry. I am sorry if that was confusing.

  45. DOR commented on Sep 5

    GDP is up because exports are up and imports are down. In other words, there isn’t sufficient demand inside the US.

    Measure real domestic demand (subtract exports and add imports) year-on-year and the economy has been in recession since January. Yep, two quarters down, first -0.18% and the second -1.56%.

    Like Europe and Japan, American is in recession right this minute.


  46. sf commented on Sep 5

    It’s the stimulus cheques. Case closed.

  47. futuredave commented on Sep 5

    I see “anon” criticizing the methodology based on the non-inclusion of oil prices in the GDP. (I would suspect Ben Stein, but he has no qualms about signing his name to hopelessly misleading nit-witticisms.)

    Still, one question remains in my mind. Is it possible that the number was correct in any way? Could the deflator have been kept low by the continuing decline in housing prices, coupled with the leveling off of oil? Is it even remotely possible that the rebate checks could have pushed a 3% growth rate?

    I always just assumed the BEA had jacked with the scales so much that a Cheerio would look like a pound of beef. But is it possible that there may have been some honest reporting?

    At a certain point, I think economists need to pass judgement not only on the size of the error, but how likely the error is to be repeated.

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