Flash Update
FLASH UPDATE
September 30, 2009
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2nd-Q GDP Decline Narrowed in Revision (to -0.8% from -1.0%)
But GNP and GDI Contractions Deepened
(GNP to -1.0% from -0.8%, GDI to -2.6% from -2.1%)
Annual GDP Contraction Remained Worst of Post-World War II Era
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PLEASE NOTE: The next planned Flash Update is for Friday, October 2nd, following release of the September employment and unemployment data.
– Best wishes to all, John Williams
GDP Outlook. The U.S. economy remains in ongoing recession. The U.S. gross domestic product (GDP) series, while heavily relied on by economists, the markets and the media, as the government’s broadest measure of economic activity, remains the worst-quality and most-heavily-politicized economic indicator published. Early reporting is based on significant guesstimation and usually is targeted at consensus economic forecasts. Given the nature of the reporting, annual growth rates are more meaningful indicators than are the highly volatile annualized quarterly rates. The latest revisions tend to signal mounting reporting discrepancies in the series, with the carefully-crafted GDP series continuing to diverge from its theoretically-equivalent but less-widely-followed GDI sibling.
Market expectations continue to build for a positive quarterly GDP number in the third quarter. Such is possible, given a buildup of excess inventories and the one-time impact from the cash-for-clunkers program. Yet, market expectations for an economic recovery are unrealistic. Weaker-than-expected economic reporting in the next month should tend to dampen third-quarter GDP expectations. That said, an occasional positive quarter-to-quarter GDP number is common in recessions, with liquidations of excessive inventories usually turning subsequent quarterly reporting negative again. Such is the likely circumstance here, even given the series’ serious quality problems.
GDP-Related Definitions. For purposes of clarity and the use of simplified language in the following text, here are definitions of key terms used related to GDP reporting: "Gross Domestic Product (GDP)" is the headline number and the most widely followed broad measure of U.S. economic activity. It is published quarterly by the Bureau of Economic Analysis (BEA), with two successive monthly revisions and with an annual revision the following July. "Gross Domestic Income (GDI)" is the theoretical equivalent to the GDP, but it is not followed by the popular press. Where GDP reflects the consumption side of the economy and GDI reflects the offsetting income side. When the series estimates do not equal each other, which almost always is the case, the difference is added to or subtracted from the GDI as a "statistical discrepancy." Although the BEA touts the GDP as the more accurate measure, the GDI is relatively free of the monthly political targeting the GDP goes through. "Gross National Product (GNP)" is the broadest measure of the U.S. economy published by the BEA. Once the headline number, now it rarely is followed by the popular media. GDP is the GNP net of trade in factor income (interest and dividend payments). GNP growth usually is weaker than GDP growth for net-debtor nations. Games played with money flows between the United States and the rest of the world tend to mute that impact on the reporting of U.S. GDP growth. "Real" means growth has been adjusted for inflation. "Nominal" means growth or level has not been adjusted for inflation. This is the way a business normally records revenues or an individual views day-to-day income and expenses. "
GDP Implicit Price Deflator (IPD)" is the inflation measure used to convert GDP data from nominal to real. The adjusted numbers are based on "Chained 2005 Dollars," at present, where the 2005 is the base year for inflation, and "chained" refers to the methodology which gimmicks the reported numbers so much that the total of the deflated GDP sub-series misses the total of the deflated total GDP series by nearly $40 billion in "residual" as of second-quarter 2010.
"Quarterly growth," unless otherwise stated, is in terms of seasonally-adjusted, annualized quarter-to-quarter growth, i.e., the growth rate of one quarter over the prior quarter, raised to the fourth power, a compounded annual rate of growth. While some might annualize a quarterly growth rate by multiplying it by four, the BEA uses the compounding method, raising the quarterly growth rate to the fourth power. So a one percent quarterly growth rate annualizes to 1.01 x 1.01 x 1.01 x 1.01 = 1.0406 or 4.1%, instead of 4 x 1% = 4%. "Annual growth" refers to the year-to-year change of the referenced period versus the same period the year before.
The second-quarter annual GDP contraction remained the worst since the quarterly GDP series was first published in 1947, with the current recession the longest and deepest since the first-dip (early 1930s) of the Great Depression. That circumstance is discussed in greater detail in the Depression Special Report of August 1st (available in the right-hand column of the SGS home page: www.shadowstats.com).
Other national revisions published today, however, showed even deeper quarterly and annual contractions in second-quarter GNP and GDI, both against initial reporting and against the current GDP quarterly contraction of 0.8% and annual contraction of 3.8%.
GDI showed a revised 2.6% quarterly contraction (versus initial reporting of a 2.1% downturn) in the second quarter, down from 7.7% and 7.3% respectively in the first and fourth quarters. The more-significant annual change was a 4.7% contraction (revised from 4.6%) in the second quarter, versus 4.1% and 2.1% respectively in the first and fourth quarters.
With a revamped deteriorating trade balance in interest and dividend payments, GNP showed a revised 1.0% quarterly contraction (previously a 0.8% contraction) in the second quarter, down from 6.6% and 6.7% respectively in the first and fourth quarters. The more-significant annual change was an unrevised (at the first decimal point) 4.0% contraction in the second quarter, versus 3.8% and 2.4% respectively in the first and fourth quarters.
Week Ahead. September Payrolls and Unemployment Rate. Due for release on Friday (October 2nd), reporting of September payroll employment and the unemployment rate remain at some risk of disappointing expectations. Per Briefing.com, payroll losses are expected at 180,000 for the month (versus a 216,000 jobs loss reported in July), with the unemployment rate rising from 9.7% to 9.8%.
Underlying employment-related reporting remains consistent with a 500,000-plus monthly payroll jobs loss (200,000 hidden in the full birth-death modeling, not just the monthly net number add-on) with an added aggregate 300,000 evident in seasonal-adjustment and prior-period-revisions games played with the headline number. The unemployment rate easily could come in at 9.9%. The payroll employment and unemployment rates are coincident indicators of broad economic activity.
In terms of related, underlying reporting, the help-wanted measures published by the Conference Board show either continued severe bottom-bouncing, with the August newspaper index holding at its historic low of 10 for the fourth month, or a deepening annual downturn, with an annual contraction of 25.6% in new ads online in September, versus a 23.9% annual contraction in August. New claims for unemployment insurance have been skewed in recent weeks by poor-quality seasonal adjust around the Labor Day holiday. Allowing for that, this series also appears to be bottom-bouncing. Both the August ISM Purchasing Managers Surveys (manufacturing and non-manufacturing) indicated ongoing employment contraction, though minimally less negative than in July. These series are leading indicators of activity in official broad employment and unemployment series.
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