Look At The GDP Fraud!

It continues to astonish me that allegedly rational beings continue to base their entire conception of how the economy is doing on a single fraudulent number—the Gross Domestic Product (GDP).

One would have to write a book to describe in all its gory detail just how the GDP gets cooked up every quarter, so I will simply point out some obvious fraud in the latest number. It's not as if we have to work hard to find the hocus-pocus—it is glaringly obvious in the mainstream reports. Consider the Washington Post's Economy shrinks as federal spending cuts trump private sector’s growth. Hell, the fraud is in the headline.

Fourth-quarter economic activity was far below the 1.1 percent annual growth rate economists had predicted. Exports fell at a rate of 5.7 percent in the fourth quarter, reflecting the slowdown in Europe. Businesses also drew down their inventories after unusually high stockpiling in the previous period. That reduced economic growth by 1.27 percentage points.

Did you catch it? Unusually high stockpiling in the previous period.

But perhaps the biggest surprise [ ? ] was the size of the drop in federal spending: 15 percent at an annual rate during the fourth quarter. Defense spending suffered an even bigger decline, dragging down growth by 1.3 percentage points. Many agencies began adopting contingency plans, instituted hiring freezes and delayed projects in anticipation of widespread budget cuts — all of which depress spending.

Still, economists said the decline looks especially dramatic because government spending had jumped more than usual in the previous quarter.

There it is again! Government spending had jumped more than usual in the previous quarter.

Here's the spin.

That may have been a reflection of government agencies and private contractors shifting spending earlier in the year in anticipation of budget cuts, boosting third-quarter growth at the expense of the fourth.

Economists are hopeful that federal and defense spending will return to more normal levels over the next few months, provided Washington can reach a deal on budget cuts and the deficit.

GDP is highly dependent on government spending, especially defense spending. And that spending is deficit spending floating atop a cesspool of endless borrowing and, lately, enthusiastic money printing by the Fed. In effect, the United States borrows or prints money to keep the GDP number above zero. Sometimes, as in the last quarter of 2012, the bamboozle fails. Economists are hopeful that these disruptions to the "normal" scam will be soon straightened out so we will be able to return to Chicanery As Usual (CAU).

Of course, standard liberal, Keynesian "thinking" blesses this spurious flimflam. Only Republicans like Senator John Cornyn (R, Texas)—and who doesn't hate them?—have the temerity to say (quoting the Post) "the idea that economic growth relies on government spending [is] a Keynesian pipe dream."

Well, economic growth which is so dependent on deficit spending is a Keynesian pipedream. That's true even when hypocritical assholes say it.

And then there is the choice of the GDP deflator, which Mike Shedlock discussed yesterday. The deflator is used to convert nominal GDP into real (inflation-adjusted) GDP. The lower the deflator, the higher the GDP. You can read Mish's article on your own, but in so far as the BEA's choice of a particular deflator appears to be arbitrary, it is a total mystery why the BEA didn't simply choose a lower deflator to put 2012 Q4 GDP into positive territory.

From Doug Short's Will The Real GDP Please Stand Up? The BEA used a deflator (inflation rate) value of 0.6%. If they had used the CPI, GDP would have contracted 1.56%, not 0.14%.

Ultimately, the fraudulent GDP practices I've mentioned, and many others I have not brought up today, will not matter. A house of cards can not stand forever. Economic life sucks for most Americans, and it sucked in the third quarter when we were told GDP rose 3.1%, and it continued to suck in the 4th quarter when we were told GDP declined 0.14% in the "advance" estimate.

This sucking is almost wholly divorced from the GDP number, but I am merely stating the obvious.

And let me mention one more fraud, this one having to do with income. I'll quote from Bloomberg's Growth Stall Obscures U.S. Consumer, Business Gains: Economy.

A jump in pay may have helped consumers. After-tax income rose at a 6.8 percent annual rate from October through December, the biggest increase since the second quarter of 2008, today’s report showed.

In addition to improving wages and salaries, some companies also paid dividends and employee bonuses earlier than usual before tax rates went up this year. The Commerce Department estimated that about $26.4 billion of the increase in incomes was attributable to early dividend payments and another $15 billion reflected bonuses and other types of irregular pay.

The gain in consumer spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from earnings...

Thus we see that income going to the wealthy inflated aggregate income because government tax policy affected the timing of dividend and bonus payments. JFC!

What is interesting to me is that supposedly rational actors are so heavily invested in this GDP fraud, which further validates every single thing I've ever told you on DOTE about how humans function. This is especially true when humans have a vested interest in maintaining the fraud.

It appears that humans will believe literally anything that allows them to pretend that the complex constructs they have created (like the U.S. economy) are functioning properly, even when it is glaringly obvious that they are not.

Have a nice weekend.

Comments

[Oliver]

What a succinct, fitting and timely epitaph for the entire economic system:

Humans had a vested interest in maintaining the fraud.

George Orwell would crack a rare smile. Let's chisel it huge in marble so it can be seen from space.

Bonny weekend from this side of the pond.