Getting Real With GDP

With the release of this week's Consumer Price inflation numbers, the debate over the accuracy of the government's reported Consumer Price Index data was once again front and center. The official numbers showed that the overall rate of consumer inflation rose .2% while the over-hyped core rate rose just a paltry .1%.

However, these incredible April numbers were the result of a seasonal adjustment that removed much of the increase in gasoline prices. Unbelievably, the report claimed that consumer's energy costs were unchanged while the actual price of crude oil rose about 12.5% and gas prices rose 11% during the same period in question -- that's some adjustment!

One of the reasons it is imperative to accurately calculate inflation is that you need a true reading on price increases in order to get a true reading on economic growth. If we used an accurate inflation rate to deflate nominal G.D.P. it would have certainly settled the argument as to whether or not the economy is in recession. Since most investors are bound by official government data, I thought it would be worthwhile to use the Consumer Price Index to derive real G.D.P. rather than the chain type price index -- which is an even more tortured inflation measurement than the C.P.I. The C.P.I. is a better estimate of inflation than the chain type price index because the chain type index allows substitution between categories, while the C.P.I. is limited to substitution within a specific category.

The following graphs show G.D.P. growth rates using the chain type price index, annualized quarterly growth rate in C.P.I. and the year over year growth rate in C.P.I.

Nominal G.D.P. Chain Type Index Real G.D.P.
Q1 - 2008 3.2% 2.6% 0.6%
Q4 - 2007 3.0% 2.4% 0.6%

Nominal G.D.P. C.P.I. Annualized Growth Rate Real GDP
Q1 - 2008 3.2% 2.8% 0.4%
Q4 - 2007 3.0% 5.6% -2.6%

Nominal G.D.P. C.P.I. YOY Growth Rate Real G.D.P.
Q1 - 2008 3.2% 4.1% -0.9%
Q4 - 2007 3.0% 4.0% -1.0%

Using the government's data on year-over-year inflation growth rates instead of chain, the recession began in Q4 2007 and the last two quarters produced negative real G.D.P growth rates. I hasten to add that investors know this; they experience real-world inflation everyday and know actual economic growth is much weaker than reported. And I'm not even using a more realistic rate of inflation, just the understated, "official" gauge that is the C.P.I.

The two most important takeaways from this are that A) the economy is much slower and B) inflation is much higher than what is generally accepted. And it is that misconception that provides investors with the ongoing investment opportunity in real assets.

Michael Pento is a Senior Market Strategist with Delta Global Advisors and a contributor to GreenFaucet.com

Comments

[research]

the GDP has become just another propaganda tool with these deceiving GOP.

There are plenty of more meaningful indicators then the GDP:
http://en.wikipedia.org/wiki/Gross_domestic_product#Alternatives_to_GDP

[themodernleader]

Olephart. Thank you for the real story.

[olephart]

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in March, before seasonal adjustment"

http://www.bls.gov/news.release/cpi.nr0.htm

That is an annual rate of 11% inflation not the 3% reported after the "seasonal adjustment".

"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 0.6 percent in the first quarter of 2008"

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The 0.6% increase was based on the aforementioned bogus inflation data. Had the untampered data been used the resulting GDP number would have been -1.2%. Likewise, the prior quarter would also have registered and negative number.


U-3 (official unemployment rate), April 2008 - 5.0%

U-6 Total unemployed, April, 2008 - 9.2%

http://www.bls.gov/news.release/empsit.t12.htm

The underlying unemployment rate is almost twice the headline rate. Thus with inflation and unemployment running at about 10% each the misery index is at 20%.


Oh, did I mention the Birth/Death jobs adjustment for April was 267,000 including 45,000 new construction jobs? This despite a 12 % drop in home building, layoffs increasing by 67% and claims for unemployment rising. The 20,000 job loss would have been a 287,000 job loss without this adjustment.

[KillTheMessenger]

Wait... you mean the average consumer keeps buying SUVs because they don't read the signs at the gas station but trust the consumer price index which says that energy has not become more expensive?

Wow... that's some smart consumer...