Monday, May 27, 2013

Lies, Damn Lies and GDP Statistics

Holy Moses I have been deceived
Now the wind has changed direction and I'll have to leave
Won't you please excuse my frankness but it's not my cup of tea
Holy Moses I have been deceived
(Elton John)

In February (Some Experts Got Some Splainin’ To Do) I pointed out that some economists thought GDP was being overestimated by as much as 2% because an incorrect “GDP deflator” was being used when adjusting the data.  At that time I did consider the possibility that the government could be intentionally manipulating the data to overstate GDP for their benefit. I did not raise the issue then because it would have sounded like “kooky talk” and appeared politically biased.  And I didn’t think it could be true because I did not believe the government would blatantly lie and abuse power this brazenly for political gain.

Based on the events of the past few weeks, it’s time to take a closer look at this.  The GDP numbers are calculated by the Bureau of Economic Analysis which is part of the Department of Commerce.  This is not the IRS, Justice Department or State Department, but this article (click here) details how government power was also misused at the FBI, OSHA and ATF.  With corruption this widespread, no government agency is immune from suspicion.

Last July I thought the U.S. economy was entering into a recession (Feelings, Really Bad, Feelings) and The Economic Cycle Research Institute (ECRI) said a recession had already begun. ECRI is very accurate in predicting recessions and recoveries.  However it has been predicting an upcoming recession since October 2011 and has received much criticism since then for its “faulty” forecast. The subsequent GDP numbers for the time period were 1.3% for Q2, 2012 and 3.1% for Q3, 2012.  However, when looking back at some important data for this period, it is difficult to find collaborating evidence that the economy was growing at all:

-         Data for the shipping ports track import and export activity which is a good indicator of overall economic activity.  A growing economy should show steady increases in both.  In mid-2012, this data was very flat. (See graph from Calculated Risk).  No signs of growth here.

-         Key measures of consumer discretionary spending (clothing and hobbies) were negative or very weak from June – October 2012. This type of consumer spending is vitally important for economic growth. Again, no signs of life here.

-         Miles Driven data remained flat and depressed (from 2008 levels, see graph).  If people are driving to work, driving to buy things, driving on business, driving on vacation, then miles should increase as they did until 2008.  Economists have been trying to explain away this data by saying more people are using public transportation and demographic shifts, but this should reduce the growth, not stop it.  There are no signs of economic growth in this data. 
-         And of course if the economy were really growing, then the job market would be growing.  I previously wrote that we have been in a “jobs depression”.  The rate of job growth is not even fast enough to handle the number of new workers entering the work force; so many people are leaving the work force. No real signs of growth.

So what difference does it make?  The GDP is just a description of reality, it does not determine it.  The only time this would really matter is before an important election, which of course happened just after preliminary Q3 was released. 

The story we were sold, and which we bought, was that the economy was getting better and faster growth (and good times) were just around the corner.  The story changes dramatically if we were really around 0% growth or in a very mild recession.  (And this corner has taken another year and counting).

I have no evidence that the GDP numbers have been intentionally overstated.  I only have my sense of economic smell and something doesn’t smell right.  I hope some economists will investigate this in much greater detail and share their findings.  There is no way to “audit” the government so it may take years to figure this one out.

So who do you trust now? I think we are operating in an “economic fog”.  Some major economic indicators are still “broken” and GDP numbers are now suspect.   On the other hand, ECRI has never backed off its recession forecast.  People have accused them of being arrogant and stubborn for not acknowledging they were wrong. But maybe, just maybe, they were right and we just don’t know it yet. 

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