Are the U.S. Government's Statistics on the Economy to Be Trusted?
There is an old adage which says there exist three types of lies; lies, damn lies and statistics. With that caveat in mind, how should one approach the government's claim that the U.S. economy contracted by "only" 1% last quarter? The question is of great importance, since this statistical marker underpins the claims being made by legions of politicians and financial analysts that the greatest global recession since the Great Depression is nearing its end, with recovery just around the corner.
Karl Denninger, a frequent guest on CNBC and commentator for a website with a skeptical take on the economy, Market Ticker, has offered a convincing rebuttal to those who stand by the official claim that Q2 witnessed a decline of a mere one percent in the U.S. economy's GDP. Here are the salient points of Denninger's critique of the numbers that came out of the Commerce Department's Bureau of Economic Analysis.
According to the Commerce Department, Q1 was actually significantly worse than the originally reported -5.5%; the actual decline was -6.4%. Due to the different benchmark, the .9% differential needs to be added to the decline in Q2, taking the actual figure to -1.9%. In addition, because the government reduced its spending in Q1 by 4.3%, and comprises approximately 30% of the total economy, its share of Q1 contraction is 1.3%. Here we come to the heart of Denninger's mathematical analysis. He believes that it is consumer activity that points to the strength or weakness of the American economy, not government spending. Accordingly, he argues that reductions or increases in spending by Washington should be subtracted from quarterly GDP measurements in order to ascertain the actual temperature of the real economy. With that in mind, he backs out the reduction in government spending in Q1, which reduces that quarter's contraction to just above -5%.
In Q2, Denninger points out, the government's spending grew by 10.9%, contributing to a positive movement of 3.3% in the second quarter's reported GDP. Remove that 3.3% from the equation, and the actual Q2 data for the consumer economy witnessed an overall contraction of -5.2%, a figure substantially worse that the official government Q2 report.
The statistical argument raised by Karl Denninger warrants careful consideration by all those who are seeking an accurate gauge of what is actually transpiring in the real economy. Furthermore, the track record of both the Commerce Department and Labor Department has not been exactly stellar with regard to its statistical accuracy in measuring the impact of the Global Economic Crisis on the American economy. Simultaneously with the release of reassuring Q2 numbers, the Commerce Department also admitted it had gotten its evaluation of the recession's affect on the U.S. economy's GDP from its onset in Q4 of 2007 through the latter part of 2008 stupendously wrong, now conceding that the actual contraction was -1.9 percent instead of -0.8%, as previously reported.
One other point made by Denninger is especially disturbing. He reminds us that an individual who borrows money from a bank or his/her credit cards would never be able to claim that loaned credit as earned income. Certainly the IRS doesn't consider credit to be income, or else it would tax us on all our debts. However, in the case of the U.S. government measuring GDP, the opposite logic applies. The increase in government spending in Q2 was predicated entirely on borrowed money, particularly as tax receipts declined significantly even as spending grew in spades. Should money that Washington borrows from its China credit card really be considered part of the GDP`s "growth," as is now the case?
There is only one flaw with Karl Denninger`s analysis; it is based on logic, a principal that seems irrelevant to any measurement of the economy derived from official government sources.
Follow Sheldon Filger on Twitter: www.twitter.com/EconomicCrisis
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Uh, let's see...
Consumer spending, which drives 71% of GDP, was down by 1.2 percent.
Housing was down, business inventories were down, exports were down - every measurable data stream down (according to the actual report) except for government spending and imports, were down. Which gets us to the comic relief aspect of this preliminary report, the fact that declining imports are actually seen as a net positive by the way our friendly government calculates GDP growth. Declining imports "boosted" our "growth," in other words, by an astounding 2.1 percent! Which means, if you remove this accounting sleight of hand and the $2 trillion dollar deficit (which boosted another percent or so of "growth") then the actual preliminary GDP growth rate was closer to a negative 5 percent. And that's before it gets revised.
The fact is, our GDP has contracted more during the past six quarters, our economy has shed more jobs and global trade has declined faster than any comparable period since the 1930s. That's neither a political statement nor an endorsement of any particular political candidate, because when they're all in bed with Wall Street and the Fed then why bother choosing sides?
No they're not...!
The old indicators do not apply..
The bailout and the stimulus definitely added debt to the GDP. All that money went to increase the income of certain companies. That income is added into the GDP.
The logic used to balance a household checkbook is predicated on the inability of the account holder to make money by fiat.
I read Karl's blog posts daily. I try not to miss a single one. Read them for yourself: http://market-ticker.denninger.net
He backs most everything he writes with math and reasoning.
I definitely must be missing something.
I agree that the use of the changes in the GDP as the indicator of the health of the economy is faulty. And I agree that the Commerce Department got the numbers wrong, for sure. So I think that the trend is just like Denninger says.
But, I find the rationale for why government growth should not be counted in the GDP - because it was funded by debt - somewhat counter-intuitive. I cannot understand the logic parlayed by Denninger and repeated by Sheldon.
Here’s the problem.
ALL GROWTH IS FUNDED BY DEBT.
Perhaps you have never heard of the DEBT-money system.
Under the DEBT-money system of fractional-reserve banking, ALL money now in existence and ALL new money that will ever come into existence, to provide for the growth of the American economy, MUST come into existence AS A DEBT.
If the economy is ACTUALLY growing, there must be a change in the money system to provide the means of exchange for the growth in the economy.
That's what a money system is supposed to do.
Unfortunately, in a debt-money system, we need a continuously increasing level of debt in order to keep the economy growing. Thus, the change in the GDP and the change in the DEBT-money supply mimic each other over time.
Can I put in a plug for a debt-free money system?
No need to create debt just to have a means of exchange.
Here it is in a nub--
"...in the case of the U.S. government measuring GDP, the opposite logic applies. The increase in government spending in Q2 was predicated entirely on borrowed money, particularly as tax receipts declined significantly even as spending grew in spades. Should money that Washington borrows from its China credit card really be considered part of the GDP`s "growth," as is now the case?"
This was the shell game that went on for 8 years under Bush who never really pulled the country out of the 2001 Recession--just increased borrowing to cover the cost of two wars (both accounted for off the books) and to hide the fact that his tax cuts were gutting our system. Every neo-con who's ever posted anything about economic growth under Bush leaves out THAT one fact--that when the govt. borrows, THEY call it income. When we borrow, it's called DEBT.
Now Obama has dumped trillions more into the economy, we've gotten a tiny boost, but it is all borrowed money that incurs interest WE will have to pay--and the FEDis more than happy to oblige. When it dries up, we will face an even worse credit crunch, be deeper in debt, and more beholden to the FED and the banks that comprise it. Without the creation of 25 million New jobs, there is no way that the consumer can ever be the engine that pulls us out of this mess--not this time.
Rule,
Let it be said that right here at this juncture there is only the possibility that you are right.
And let economists put the probability on that possibility that you are right.
But whatever the outcome I question whether there is anyone in power who sees that the probability is sufficiently greater than zero to call for a plan for an exit-strategy that would take us away from the faulty, and imploding debt-money system, and into a stable monetary system.
At some point, and I hope it is very soon, the American people are going to discover that the money system as the basic socio-economic tool that needs to be controlled on behalf of the people if we are to ever restore economic stability in this country, and throughout the world.
The private debt-money creation system of the fractional reserve bankers has run its course.
They have crashed the school bus.
And those are our grandkids.
Monetary Transformation Now.
Greenbacks.
End the FED.
Sheldon, you know the expression well: "fool me once," etc.
When a rather obvious organized-crime consortium of "twenty-odd banks cum insurance companies cum finance companies that is to say only the 'best' of all-three," paper the economy with hundreds of trillions(!) of dollars worth of spectacularly-fraudulent "securities," why do they expect to be believed?
Furthermore, when our own Government was quite-so-obviously "hip-waders deep in there along with them" in what in any other circles is called ... fraud, swindling, usury, deception and "oh, just pick your favorite felony" ...
... what fool would believe them?
It's ... Not ... True. "The truth is not in them." And in the world of money, that's precisely and completely the problem. If there is no Truth, then there is nothing at all.
Also, in the end, just who takes the fall in this web of "tort and extortion?" Is it the few who call themselves gobzillionaires? Or the Senators and Congressmen who lap dog-food from their bowl when the little bell rings? No.
"It's just you 'n me, kid, and 306 million other people just like us." Getting robbed out of thousands of dollars apiece every year while watching our savings evaporate into dust.
There was a good reason why the authors of our Constitution put "bribery" right next to "treason."
A downward revision of the one percent figure is inevitable and without our hyper-Keynesian government spending spree the figure would have been nearly as bad as last quarter's, yet the real question is where is the future GDP growth that everyone in the mainstream press is predicting going to come from? How do we return to a so-called healthy growth of around three percent when you consider...
- that growth during the current decade has averaged less than one percent once we subtract mortgage equity withdrawals from the equation, which we should considering they no longer exist?
- that the growth during the prior decade was artificially exaggerated by the largest equities bubble in U.S. history which swiftly evaporated as soon as the decade ended?
- that consumer spending, which drives roughly 70 percent of our GDP (and by association 18 percent of the world's) had risen steadily throughout every recession since the second world war but has dropped sharply and thereafter stagnated during the current one?
Actual U.S. GDP growth - once we subtract bubbles and excessive government spending (which generates burdensome debt, lest we forget) has declined steadily for the last half century. This is neither a political statement nor an exaggeration for dramatic effect; it's a fact. Anyone who denies it is either ignorant or delusional.
The government statistics have been cooked for years, it's in the interest of the administration in power to put a good spin on the economy to make them look better. If you look at the question of real wages and the purchasing power of the average worker, the cost of cars has risen dramatically over the years. The government doesn't take the percentage increase in the price of a car and look at it against the percentage increase in the average wages. The government modifies the percentage increase in the price of the car by subtracting "value added" features. So the additional cost of everything from variable speed window wipers to passenger side airbags has been subtracted (can't say if it's a percentage) from the increased cost of the car before it's compared to the average "rise" in wages, making the rise in wages look more substantial.
This puts a great spin on the wages most of the country earns, unless you are in the market for that new car.
The government GDP statistic is as manipulated as the INFLATION statistic.
Any GDP calculation must take inflation into account. For example, a 3% rise in production coupled with a 4% inflation rate would result in a -1% GDP.
According to www.shadowstats.com the inflation rate is closer to 3% than the official reported -1%.
Using the 3% inflation rate, last quarter's GDP change would be -5% !
The inflation rate has consistently been under-reported by the government for years for political reasons, to present a rosier outlook, and particularly to suppress interest rates and cost-of-living increases.
The recession is local. No amount of truth will convice some people that there's a recession until they actually drive down your street and see the blight.
With this administration I am sure that we will continue to see an increase in the fudging of the numbers and an acceleration in misleading the public. So much for the transparency....of course I never believed that either!
I'm pretty sure that there is a department of numbers fudging, but the most misleading tactic I've ever seen was the Bush administration presenting a budget that excluded all the cost of fighting two wars (including the cost of war profiteering no bid contracts). Those cost were put through an overly compliant Congress as emergency spending measures after the budget had passed.
"an individual who borrows money from a bank or his/her credit cards would never be able to claim that loaned credit as earned income"
If I borrow money and use it to buy a widget, it is indeed income -- for the widget maker. As such, it is rightly included in GDP. It doesn't matter whether it's earned income or investment income: the widget factory and the worker's labor are both involved in producing something that someone was willing to pay for. Government transfer payments do not count toward GDP, only government spending -- i.e. payments by the government that really are income to the people who fix the potholes or own the chemical plant that the government buys asphalt from.
The government and the corporate media are telling us what the plutocracy wants us to think is true. They all are so habituated to lying that they often lie when the truth would serve them just as well. Only fools believe what they read in government reports or hear on TV "news".
You must be logged in to comment. Log in or connect with
