The first revision for Gross Domestic Product (GDP) for the first quarter (1Q15) came out negative. The economy is contracting! Is it time to panic? The White House attributed the slowdown to weak exports, which are quite well known to be a problem. But is that all?
As we have commented on at length before, the GDP numbers are full of fudge, so it may be hard to know just what to make of them. A cynic would say, and probably does say, that they the Bureau of Economic Analysis (BEA) is making the numbers up as they go to make everyone happy.
Perhaps you are a bit too diabetic to handle all the fudge, either, but this problem is a bit more savory than sweet. It’s all about the seasoning – or, rather, the “seasonal adjustment”.
All of the numbers that are used to gauge our economy have built into them a seasonal adjustment. This includes all employment and output data. It’s absolutely necessary to do this if you want to rely on these numbers as an indicator of how things are going. Every January, for example, there is a mini recession as about 2.9 million people lose their jobs. This happens as holiday retail workers are laid off and construction grinds to a halt.
There is a similar effect in summer, when everyone goes on vacation.
In order to make the numbers all work out they are adjusted to even things out over the year. As long as the net over 12 months or four quarters is zero, it all comes out even. The problem, however, is that the last five years have seen downturns in the first quarter of the year that were simply not repeated in any other quarter. Here is GDP by quarter since 2010:
The BEA has decided that their seasonal adjustment must be wrong. That makes sense, but there are two problems: why is it wrong, and how will the cynics and conspiracy theorists respond to a change in the seasonal adjustment?
The reason for the harsh season is hard to say. It appears that because businesses are slow to make expansion plans new spending doesn’t kick in right away in January as it used to. GDP is measured by calculating expenditures on capital and consumer items.
One alternative measure that is being promoted looks at net income of businesses, which is \much smoother. By then simply looking at trends over the past year the data is automatically smoothed. It’s called GDP+ and it requires significantly less artificial seasonal adjustment overall. The Philadelphia Fed has been tracking it for a few years and is happy with the data.
As to the second problem, which is how the tin-foil hat crowd will receive all this …. Who really cares? We all know that any measure is going to be flawed so any measure that seems to work out is helpful.
We can see that by GDP+ the economy is still only growing at a bit better than a 2% clip, which with inflation at about zero is … still not good. It’s essentially treading water overall, but at least we aren’t drowning.
So what is the correct answer for GDP? That anyone who frets over these numbers is certainly kidding themselves no matter what. There is some reason to believe that either winters are getting harsher or businesses aren’t spending in the first quarter as they used to. Whatever the reason, we see it every year and it probably means the measurement is flawed, at least in terms of what it is supposed to do.
Should such heavily fudged numbers be used at all? In the end, it’s all better than nothing. But we can’t make such a big deal out of it. Between the seasoning and the plain fudgy, it’s a really odd flavor overall. But we can be sure that it’s not the only thing you should have in your diet of information.
A new number? Maybe GDP+ will catch on, but it’s hard to see it happening. The news still relies on the headline unemployment number, U3, rather than the much more reasonable U6. The heavily processed numbers will always have a place in popular media.
That’s one trend we can certainly rely on, season after season.
Tin foil hat crowd…you are a laugh Hare.
Your economic illiteracy is exceeded only by the illiteracy of your political/world.
This is what comes of otherwise smart people–and smart you are— living in the bubble of (a)social media. I’m sure nothing is more i important to you than your fake “followers/ friends” who you’d never dare to challenge with the truth/bad news.
Your delusions will soon end. I won’t bother with the litany because it’ll do no good—all is well after all, right?. The evidence is overwhelming!
Tell your audience, how well do you negotiate the market place that qualifies you to tell us about the economy?.
I will make an educated guess that you are on food stamps, work only irregularly and are lucky to make $15,000 per year.
Now, pls excuse me while I adjust my tin foil hat.
Aren’t you a lot of fun? I’ll just let you know that your assumptions about me are wrong and leave it at that. Whatever your problem is …. well, it’s your problem. You’re pretty far off the mark on my own shortcomings, though as a human there are always some.
If you’d like to talk about the economy and the (grossly) imperfect ways we measure it, I’ll still be here for that.
You have convinced me that these numbers are totally meaningless. I don’t think that’s what you intended but you did it. I’ll ask again, are there any numbers published that aren’t so totally manipulated?
I know there have to be better numbers out there which are nothing more than the sum total of all goods and services, but I can’t find them. People in the big banks do nothing but keep track of this stuff, but it’s all proprietary. I am looking to see what kind of information I do have access to, but it’s not at all obvious.
We do need more raw numbers, yes.
None of this makes any sense by the time they get done with it.
I think that’s a little strong, but it is hard to say “GDP is …” with any conviction.
If the intent is to provide a fine-tuned gauge of the economy does the number ultimately have any meaning in the real world? Is there something else that is more important?
You make a good point. It may not have any real meaning.
I am thinking about Gross Output (GO), which I wrote a piece about last August: https://erikhare.com/2014/08/01/new-measures-for-new-times/
This has the advantage of including semi-finished goods which are exported (ie, “Intermediate Inputs” or II).
If you graph that and use a Year over Year change instead of quarter by quarter, you have this graph:
I think this is the best indicator of health we have. Gross output is gaining 4% per year, averaged over the last year.
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