On Friday April 27 the Bureau of Economic Analysis (BEA) released the advance estimate for gross domestic product (GDP) growth in the 1st quarter.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.2 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3.0 percent.
[My note: Real GDP is inflation-adjusted. A deflator is used to adjust nominal GDP. ]
Graph from Tim Iacono
The result was below the consensus forecast, so the general "thinking" was that 1st quarter growth was a disappointment. The best analysis of GDP comes from Rick Davis of the Consumer Metric Institute. Rick provides an e-mail report which makes for some very interesting reading. I know that Mish already covered this story, but I thought I would give it that distinctive DOTE treatment. Here's what Rick had to say.
Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%.
As a reminder, lower "deflaters" cause the reported "real" growth rates to increase — and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes — and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.
What's this? If the BEA had used the CPI-U instead of the lower deflator they chose, the resulting annualized growth rate would have been 0.08%, which might as well be zero. Now I want you to think back to last Thursday's post Your Government At Work, Part 79. What did we learn from the excellent reporting of USA Today?
Let's repeat that last sentence to make sure we're not seeing things.
If the websites were created using federal funds, it could violate federal law prohibiting the production of propaganda for domestic consumption.
Well, damn! It is illegal to use federal funds to produce propaganda for domestic consumption.
Well, have we caught the BEA with their pants down? Yes and no. Clearly they are producing propaganda for domestic consumption, and that's illegal. By using a custom deflator, they produced an annualized growth rate of 2.2%, which was the headline number. As Rick Davis said, that special deflator was the headline number's best friend.
Unfortunately, there are many ways to get the propaganda job done. The BEA can use any deflator they want to use, and there's no law prohibiting making the GDP number look better than it actually is.
Perhaps you think this story is unimportant. Everyone knows the government routinely lies with statistics and every other way, too. And there are two more 1st quarter GDP reports yet to come, and this number will be revised. And then much later, perhaps years from now, the BEA will revise the number again. Ever since the world changed in 2008, those revisions tend to be downward.
But think about how much ink has been spilt over whether the United States is going into another recession this year. Although the National Bureau of Economic Research, the official arbiter of the business cycle, uses a number of indicators to call a recession, in practice most of those discussing this possibility are referring to two consecutive quarters of negative (or no) growth. We just had a no-growth quarter, but it doesn't count because the BEA used a custom deflator.
And thus we are forced to conclude that life in 21st century America is like living in a hall of mirrors. Every reflection we see is distorted almost beyond recognition. After it is final, the official 1st quarter GDP number will be cited over and over again by economists everywhere. Every one of these economists will ignore the deflator distortion. Obama will use the number to tell us the economy is growing, but not fast enough to create more jobs. The hall of mirrors just goes on and on and on.
Welcome to the Fun House. Or, to borrow the title of one of Kurt Vonnegut's books, Welcome to The Monkey House.