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GDP, Inflation & Recession

Why do I spend as much time as I do debunking inflation, employment and housing data? Today, you will see precisely why. 

At 8:30am, we get the advance GDP data from BEA. Consensus is for a marginally positive data point -- 0.3%. This will follow Q7 2007  of 0.6%.

In terms of debunking the misleading data stats, today is the day where the rubber meets the road. Why? Well, if the official inflation data was reported in a way that was more reflective of reality, Q4 last year would likely have been anywhere from 0.75% to 1.5% lower (if not more), sending it into negative territory.   

The same will be true for today's GD data point, with the probable overstatement enough to keep it marginally positive or flat.

Why does inflation matter so much to GDP? Gross Domestic Product (GDP) is the "broadest measure of aggregate economic activity and encompasses every sector of the economy." If you want to know understand how weak or strong an economy is, GDP is where you begin. But, you need to determine how much of GDP is nominal, and how much is real (i.e., after inflation growth).

Consider an economy that sold $100  worth of goods and services in one quarter. The next Q, it produced $110 worth. When determining the GDP of this economy, you want to know how much of those gains was additional output, and how much merely price increases.  Its usually a combination of more widgets and higher  prices, so if you want to know exactly how much the economy expanded, you need to know exactly how much inflation there was. Understate inflation, and you overstate growth. 

If today's GDP is marginally positive, following Q4's marginally positive GDP data, then we officially will not be in a recession by the classic "2 consecutive quarters of negative GDP growth."  This means that if the correct inflation deflator was built into GDP, we would have our two consec quarters.

Hence, for the reality based community, the recession will be officially here.

Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.

Wednesday, April 30, 2008 | 07:10 AM | Permalink | Comments (9) | TrackBack (0)
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Comments

BR queried: Of course, if you believe that actual inflation is running about 2.5%, then you should feel free to ignore this analysis.

Please clarify: 2.5% at what rate of time? I believe oil, food, and other hard assets do this on an almost monthly basis now that overly abundant low cost credit is bidding up prices of commodities.

I remember the good old days not too very long ago when I didn't give a shit. I could always adjust my behavior to avoid the increases and stay on the good side of the updraft.

Then I read a book on asset bubbles written by a large number of experts and heard of Greenspan's incompetence; where he claimed asset bubbles were impossible to recognize until after they burst ... and even if they were recognized you couldn't do anything abou them except clean up the mess afterwards.

I'm sorry to say I was shocked at the stupidity of those who are supposed to be in charge and maintaining control. I'm starting to think that stupid should be a criminal offense punishable by asset forfeiture and jail time. Should SarBox II be created, but this one deals with taking personal responsibility for being a plundering retard?

Posted by: cinefoz | Apr 30, 2008 7:37:37 AM