JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 FLASH UPDATE

July 31, 2008

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GDP Report is Political Garbage

Lowest GDP Inflation in 10 Years Generates Strong Growth Report

Downward Revisions Put 4th-Quarter in Contraction

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Official Line: Never Was a Recession, At Least Not Before the Election

Despite sharp quarterly contractions in employment, industrial production, new orders, real retail sales and residential construction, among other series, the second-quarter 2008 GDP was reported as booming (net of inventory reductions, the inflation-adjusted economy expanded at an above-average annualized 3.9% rate). With fourth-quarter 2007 revised into a 0.17% contraction (was a gain of 0.58%), the story now will go along the lines that the economy dipped a little in the fourth quarter — not enough to be called a recession — and has been in recovery ever since. Such is an absurdity, given the reporting of better quality surveys (see yesterday’s, July 30th, Flash Update) and extremely strong anecdotal evidence to the contrary, but the reporting will enable the pushing off of any recession recognition until after the election.

Key to the unbelievable report was the use of artificially low inflation in deflating the GDP. In theory, the GDP is first estimated in nominal, or not-inflation-adjusted, terms, and then deflated using the GDP’s implicit price deflator (IPD). The IPD was at an incredible annualized 1.1% for the quarter, down from 2.56% in the first quarter, and at the lowest level seen since second-quarter 1998. The lower the IPD inflation, the stronger will be the inflation-adjusted growth. With annualized CPI inflation up by 5.04% in the same quarter, there is enough room in the price adjustments for the second-quarter GDP to be in contraction.

In the context of a mildly weaker historical GDP — overall downward revision of 0.5% spread over three years — the Bureau of Economic Analysis reported that the "advance" estimate of annualized, seasonally-adjusted real (inflation-adjusted) growth rate for the second-quarter GDP was 1.89% (-0.02% net of revisions) +/- 3%, up from a revised 0.87% (previously 0.96%) in the first quarter. Year-to-year annual change in second-quarter GDP fell to 1.82% from a revised 2.54% (previously 2.55%) in the first quarter.

Further detail will follow in next week’s newsletter.

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