GDP fails ‘commonsense sniff test’

Wednesday, September 10, 2008 | 06:50 AM

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

Wednesday, September 10, 2008 | 06:50 AM | Permalink | Comments (9) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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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?

Posted by: Vermont Trader | Sep 10, 2008 8:00:18 AM

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