As of December 5th, the economy grew by 3.6% in the third quarter of 2013. This is good news because it exceeded the expectations of economists:
Reuters survey of U.S. economists’ forecast for PreliminaryQ3:
+3.0 pct for GDP
+2.0 pct for Final Sales
+1.9 pct for Implicit Deflator
+1.4 pct for Core PCE price index
+1.9 pct for PCE price index
Waitaminute…if GDP grows by 3%, but the Implicit (GDP) Deflator is 1.9%, then doesn’t GDP grow by only 1.1% (3.0-1.9)?
Oh well, the newly revised GDP number shows that
Gross domestic product grew at a 4.1 percent annual rate instead of the 3.6 percent pace reported earlier this month, the Commerce Department said in its third estimate.
That was the quickest pace since the fourth quarter of 2011 and an acceleration from the April-June quarter’s 2.5 percent. Third-quarter growth was first estimated at a 2.8 percent rate.
I have a few problems with these numbers:
1. They are revised estimates of estimates of estimates.
We don’t know what is really happening, because the final numbers won’t be released until January 2014. You see, government economists make estimates of GDP. Then, they revise those estimates and release this number a month later. Then they conjure up ‘final GDP’ and release that number a month after their revised estimates are reported. And even later, they revise the ‘final GDP’ numbers. It never ends; reportedly, government economists are still revising GDP from World War II.
2. Inflation is responsible for much of the increase. GDP is supposed to be a measure of production in the economy. The problem is that inflation (i.e., an increase in prices) will lead to an increase in GDP, even without a corresponding increase in the actual production of goods and services. From the linked article:
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was raised 0.6 percentage point to a 2.0 percent rate. The revisions reflected higher spending on both goods and services than previously estimated.
There was stronger spending on health care and recreation. That lifted spending on services to a 0.7 percent rate, instead of the flat reading that was reported early this month. Spending on goods was bumped up by four tenths of a percentage point.
“The consumer is back in the game,” said Chris Rupkey chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “They are taking care of themselves, spending more on healthcare, spending more on recreation, and driving around more, buying more gasoline,”
Higher spending on health care? But I thought that Obamacare was supposed to make health care less expensive? And all of this driving was due to the Labor Day and Thanksgiving holidays. It happens every year…
Consumer spending grew at a 1.8 percent rate in the second quarter. Despite the pick-up in consumer spending, inflation remained contained. An inflation gauge in the government’s GDP report rose at a 1.9 percent rate, instead of the 2.0 percent rate reported early this month.
Inflation remained ‘contained’. What they are saying is that the reported increases in demand did not result in higher prices. This completely violates the Law of Demand (higher demand results in higher prices, ceteris paribus). Which is the nice way for me to say that they are lying and making up the numbers as they go.
A core measure that strips out food and energy costs was also revised down to a 1.4 percent rate from a 1.5 percent rate.
That’s right, folks. The ‘core measure’ that they use to estimate GDP takes out the costs of food and gasoline because they are considered ‘too volatile’. Question: what are two areas that consumers spend a large portion of their income on? If you guessed food and fuel, you move to the head of the class.
3. The government changed how GDP was calculated in July 2013.
Government estimates of GDP no longer matter. The BEA changed how GDP was calculated last July:
A pharmaceutical company develops a new cancer drug. A Hollywood studio creates a box-office blockbuster. A song writer records a new hit. On July 31, BEA will begin including the amount of money businesses invest in the production of such intellectual property as part of gross domestic product (GDP).
Here’s my question to the BEA: how do these items add to the production of goods in the economy?
Here’s my answer: they don’t. For example, take the latest hit song by
Hannah Montana Miley Cyrus. How do sales of Wrecking Ball on iTunes increase my well-being? What if that crap actually makes me worse off because…well, have you heard that song or seen the video? Assuming that most people over the age of 25 are like me, wouldn’t that make GDP decrease instead of increase?
Oh, well. This change can’t make much of a difference, can it?
Yes it can. It was estimated (there’s that word again) that adding intellectual property would increase GDP by 3%:
The US economy will officially become 3 per cent bigger in July as part of a shake-up that will see government statistics take into account 21st century components such as film royalties and spending on research and development.
Billions of dollars of intangible assets will enter the gross domestic product of the world’s largest economy in a revision aimed at capturing the changing nature of US output.
Did you see what I saw in that article? These are intangible assets. Which means they don’t exist in the sense that a car, house, or steak do. Not a problem, you say.
Well consider this: in accounting practice, there is something called goodwill. Goodwill doesn’t exist; it is a number that accountants use to make things balance out on the books:
Goodwill arises when one company acquires another, but pays more than the fair market value of the net assets (total assets – total liabilities). It is classified as an intangible asset on the balance sheet. However, according to International Financial Reporting Standards (IFRS), goodwill is never amortized. Instead, management is responsible to value goodwill every year and to determine if an impairment is required. If the fair market value goes below historical cost (what goodwill was purchased for), an impairment must be recorded to bring it down to its fair market value. However, an increase in the fair market value would not be accounted for in the financial statements.
Anyone who pays more than fair market value for a company is either stupid or incompetent. I love how management gets to change the value of goodwill every year. Hmm, kinda like how government economists get to change the value of GDP!!!
Getting back to the point: the change in July 2013 meant that GDP was going to rise by 3% in the 3rd quarter anyway. The two government estimates for GDP in the 3rd quarter of 2013 are 3.6% and 4.1%. Without the change in GDP calculation in July, the estimates would have been 0.6% and 1.1%. Not exactly a great growth rate.
And taking the GDP deflator into account, the estimates would be negative. If inflation was 1.9% (the Implicit Deflator from above), then GDP was either -1.3% or -0.8%. And this negative GDP growth is proof that the economy is still in a recession.
Apparently, government economists are the real Underpants Gnomes…