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.
To get a better sense of what sort of economy produces a 3.3% GDP -- and to make sure that a single outlier didn't skew the results -- we took the average of the prior 12 months data for each of our 9 key factors.
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
today.
>
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 |
| GDP Chained 2000 Dollars QoQ SAAR |
3.30% | ||
| 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 PMI SA |
50.2 | 49.9 | 53.1 |
| CPI
Urban Consumers YoY NSA |
5.00% | 5.60% | 2.90% |
| PPI
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.
>
Previously:
Is GDP (via BEA) Measuring Growth or Inflation? (August 2008)
http://bigpicture.typepad.com/comments/2008/08/are-you-measuri.html
What Conspiracy? (June 2008)
http://bigpicture.typepad.com/comments/2008/06/conspiracy-theo.html
GDP Deflator Inflator ! (September 2008)
http://bigpicture.typepad.com/comments/2008/09/gdp-deflator-in.html
GDP Deflator versus CPI (August 2008)
http://bigpicture.typepad.com/comments/2008/08/variation-on-th.html
GDP: Lowest Inflation Rate in 5 Years (August 2008)
http://bigpicture.typepad.com/comments/2008/08/gdp-gross-decep.html
Thursday, September 04, 2008 | 07:32 AM | Permalink
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Comments
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:
http://pbp.typepad.com/economy/2008/08/15-million-more-at-the-unemployment-office.html
Looks like the employment picture (or lack thereof) seems very ominous.
Posted by: JimmyY | Sep 4, 2008 7:51:02 AM
Barry,
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..)
Posted by: C. Fischer | Sep 4, 2008 8:10:51 AM
Big jump in claims...444k...
Rosy Scenario just left on the Greyhound...says she won't be coming back...
Bruce in Tennessee
Posted by: Bruce | Sep 4, 2008 8:38:28 AM
In a growing economy we shouldn't be loosing jobs. Can any one answer why we have +ve GDP and -ve job growth?.
Posted by: SJac | Sep 4, 2008 8:46:44 AM
"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?
Posted by: Winston Munn | Sep 4, 2008 8:54:25 AM
4.3% productivity??????? Relatively speaking, now even fewer working to produce fewer items. Baffle with BS.
Posted by: Stuart | Sep 4, 2008 8:56:27 AM
The productivity number is inflated by the bogus GDP number.
Posted by: Wisdom-seeker | Sep 4, 2008 9:23:14 AM
Barry-
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?
Posted by: Davey Crockett | Sep 4, 2008 9:43:58 AM
Please keep posts on topic . . . .
Posted by: Barry Ritholtz | Sep 4, 2008 9:44:36 AM
graven images like graven ideas are difficult to shuck/shrug/shun
Posted by: Greg0658 | Sep 4, 2008 9:55:18 AM
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...
Posted by: JimmyY | Sep 4, 2008 9:58:37 AM
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.
Posted by: Victor Wang | Sep 4, 2008 10:13:16 AM
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!
Posted by: Sean | Sep 4, 2008 10:19:52 AM
Sorry Barry, you are right...delete my previous...my mother and dad raised a smartass part of the time.
Bruce in Tennessee
Posted by: Bruce | Sep 4, 2008 10:22:19 AM
Terrific post Barry.
Posted by: Josh | Sep 4, 2008 10:23:16 AM
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.
Posted by: Stuart | Sep 4, 2008 10:24:42 AM
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.
Posted by: Ed Miller | Sep 4, 2008 10:28:29 AM
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.
THE END
Posted by: Edward Charles Ponzi Jr | Sep 4, 2008 10:37:04 AM
Excellent analysis, Barry and Michael.
Posted by: jg | Sep 4, 2008 10:43:25 AM
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?
Posted by: Jeff M. | Sep 4, 2008 10:51:29 AM
i dont believe it.....cnbc's erin burnett just called sarah palin a "milf"
Posted by: jerry bright | Sep 4, 2008 10:57:35 AM
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.
~~~
BR: That is the entire point of this exercise!
If this were an apples to apples comparison, our results would have been even stronger. Everything has been incrementally tweaked over the years to appear better than they really are.
Hence, its no surprise that this economy still reeks when compared to other 3.3% GDPs.
Posted by: Walker | Sep 4, 2008 10:59:40 AM
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?
Posted by: Jeff M. | Sep 4, 2008 11:03:22 AM
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
Posted by: Mike in NOLa | Sep 4, 2008 11:09:08 AM
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
Posted by: Scorpio | Sep 4, 2008 11:18:20 AM
