posted March 5, 2012
A Comment on GDP and Other Year-End Statistics

On Friday, January 27, 2012 the first advanced reporting of fourth quarter 2011 GDP statistics were released. It showed a ‘first’ estimate of GDP growth of 2.8%. That follows a third quarter GDP number of 1.3%, and a first half 2011 of only 0.8%. At first glance it would appear economic growth is on the rise, supporting the claims of politicos and pundits that recovery is on the way (once again). But a closer look shows the US economy still remains mired in a stagnate, little to no growth condition.

A normal historical growth rate for the US economy is about 2.5%. But that’s a long run average pre-2007. That long run 2.5% average is well below what is normal for a recovery from a recession at our current stage two years after 2009. At our current stage in past recession recoveries, the GDP growth rate is ‘normally’ 4% to 5%. For the entire last year of 2011, actual GDP rose only 1.7%. That’s easily less than half the normal at this stage for a recession recovery.

But even that 1.7% average for all of 2011 assumes the official 2.8% last quarter was really 2.8%. It wasn’t. Last quarter’s 2.8% was really around the same 1.0% rate that marked the first nine months of last year, 2011. Here’s two reasons why:

To begin with, the fourth quarter 2.8% number will likely be revised downward to 2.7 or even 2.6% in the next two revisions that typically follow the reporting of ‘advance’ first estimates of GDP reported on January 27. But let’s not even count that reduction yet. Let’s start from the reported 2.8%.

The first problem with the fourth quarter estimate of 2.8% is that 1.9% of that total was due totally to business inventory buildup in the fourth quarter (which means it won’t last going into 2012). In the preceding third quarter 2011, inventory building by business collapsed to almost zero. The 1.9% therefore reflects recovery of the inventory buildup that didn’t occur in the third quarter 2011 but got put off to the fourth quarter. So the 1.9% for fourth quarter 2011 inventory buildup was really about half that, or only around 1%. That means 1% should be deducted from the total 2.8% GDP growth in the fourth quarter. And in turn that means GDP really grew only by 1.8% in the fourth quarter—not by 2.8%.

Here’s where the second problem comes in. The 2.8% is what is called ‘real’ GDP. That is, GDP that is adjusted for price inflation. The specific price index that is used to adjust for inflation for GDP is called the ‘GDP deflator’. If that deflator reports a very low inflation rate, the real GDP growth is higher. The GDP deflator claimed that inflation in the fourth quarter of 2011 was only a mere 0.4%. Does anyone believe that? The true inflation rate for the fourth quarter has to have been at minimum at least 1%. That’s 0.6% higher than the 0.4% that was officially reported by the GDP deflator. That 0.6% higher should therefore be subtracted from our adjusted 1.8% GDP growth rate in the fourth quarter. The real ‘real GDP’ should therefore be around 1.2%–that is, just about the 1% rate of GDP growth that occurred throughout all of last year.

In short, the US economy remained stuck in its stagnant, no-to-low growth condition in the fourth quarter that characterized the US economy throughout all of 2011.

There are a host of other problems with government statistics for the fourth quarter as well. Another area of problem is reporting on jobs. It’s important to know that the 200,000 job growth reported by the labor department was not the true, actual number of actual jobs created. The 200,000 is a statistic; that is, a manipulation of the actual raw, true jobs data that is then adjusted for seasonality assumptions by the labor department, new business formation assumptions, and other operations on the data. These adjustments typically tend to boost the real job numbers during the year end holiday season higher than the actual. The labor department’s seasonal and other adjustments were more accurate before 2007, but are now significantly less so in the current recession and stagnant recovery that makes the present economic downturn unique.
As just one example with regard to jobs: the seasonal adjustment for December 2011 reported 42,000 hires of ‘couriers and messengers’. These are workers hired by UPS, Fedex, etc. to accommodate temporary surges in parcel mailings. These are temp workers that then are typically laid off after the holidays. But the 42,000 reported was actually 86,000 messengers and couriers, most of whom will be laid off soon in 2012. Another related problem is the ‘seasonal adjustment’ of workers hired in retail, another temp-part time surge in the holiday season. The labor department gross underreported those numbers as well. Those workers too will be laid off in huge numbers come the first quarter of 2012.

Another deeper look at what really happened to retail sales in November-December is also revealing. Despite the hype around a ‘record’ holiday season, the facts now coming out in January show that retail sales, year over year, rose only 0.1% in December, and most of that due to car sales. Minus auto sales, retail sales declined in December 2011 compared to the year earlier, the first such fall since May 2010. And that despite record price discounting by retail sales companies. Even that poor retail sales performance was driven by rising use of credit cards once again by consumers, or by their dipping into savings for holiday spending. The latter was not surprising, given that wages and salaries rose only 1.8% (and most of that at the high end) while prices rose double that at 3.5%. In other words, real wages and income continued to fall, as they have since 2009. Over the past decade household income has declined has been about 10%.
No wonder holiday sales were so poor, given the continuing decline in real wages and household income for the ‘bottom 90%’.

To sum up, fourth quarter GDP was really much less than reported. The first quarter 2012 will be little different than 2011—and even possibly much worse should the Eurozone almost certainly experience a severe banking crisis this year. The real outlook for the US economy (not the politic-pundit version) and the real problems in the Eurozone and slowing global economy elsewhere is why the Federal Reserve a few days ago also indicated it planned to keep interest rates at zero for an additional two years, through 2014, instead of early 2013. It knew the public reporting on the economy for December and fourth quarter was really not all that rosey. The Fed knows the US economy will most likely get weaker, not stronger, in 2013 and perhaps even sooner. It knows that US banks will have to be bailed out again if European banks tank this summer. And if that happens it means a double dip recession this writer has been predicting for no later than early 2013.

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