Tuesday, July 22, 2008

Statistics In Disconnect With Reality

John McCain economic advisor Phil Gramm was generally mocked and condemned when he recently stated that there is no real recession in America and that Americans are simply experiencing a "mental recession", and then further added that Americans are "a nation of whiners".

Yet if you look at the official GDP numbers, Gramm does not seem to be off the mark, at least not with that "mental recession" part. John Berry on Bloomberg News predicts that the Q2 U.S. GDP number will show 2.5% growth. And while I think it will come in lower than that, it will likely be closer to 2.5% than 0%.

But exactly where do you see that growth? I mean, with employment, real wages and profits falling, that GDP number seems to be out of touch not just with the public's perception of their economic situation, but also with all other available information of the economy.

There are several explanations for this, but the most important one is the factor I discussed in detail here. John Berry notes that rising net exports will be the most important factor behind the predicted growth. But here we notice something very fishy. Trade data for June is not yet available, but the average trade deficit for April and May was $60.1 billion. By contrast, during January to March, the average trade deficit was $58.3 billion. Unless we assume a real dramatic decline in the trade deficit in June (which is highly unlikely), then we will thus see a significant increase in the trade deficit between the first and the second quarter. But rising net exports is by definition supposed to imply a lower trade deficit, and certainly not a higher trade deficit.

However, in the flawed way the Bureau of Economic Analysis calculate GDP, the actual trade deficit is irrelevant. Instead they assume that sharp increases in import prices do not lower purchasing power and calculate exports and imports by volume. And according to that methodology, the average trade deficit for April and May was just $45.1 billion, down from $49.5 billion during January to March. That means that trade could add as much as 2 percentage points to GDP, even tough the actual trade deficit will be increasing!

This will again illustrate how flawed the current GDP methodology is, and it also explains the disconnect between GDP numbers and the economists who take them at face value, such as Phil Gramm, and the dismal economic reality that most Americans experience.


Anonymous Mike said...

GDP... it also makes the mistake of adding government spending, instead of subtracting it.

I was discussing this someplace... ah yes...


with a response from FSK and others here:


12:23 AM  
Blogger Flavian said...

One reason US domestic US recessions are more obvious than domestic recessions in Sweden is of course that a small country more easily can compensate a domestic recession through increased export efforts.

However, since the US economy is getting smaller relative to that of the rest of the world, it may even become possible for large countries to compensate recessions through increased export efforts.

Thus we might see the end of statistically evident recessions, even in larger countries. Please keep in mind that this is a hypothesis.

12:07 PM  
Anonymous Pete Murphy said...

Raw GDP is an extremely poor measure of the health of America's economy. A better measure is per capita chained GDP, which strips out the effects of inflation (which, by the way, is grossly understated) and the effects of population growth. Using this measure, you'd find that the U.S. economy has spent more time in recession in the past three decades than in recovery.

The trade deficit is not responding to the falling dollar because the trade deficit is the cause of the falling dollar, not vice versa. The trade deficit is caused by granting free access to our healthy market to grossly overpopulated nations that do not have an equivalent market to offer in return. Only through a return to sensible trade policies that prevent this imbalance (in other words, tariffs) will the trade deficit in manufactured goods (not oil) be reduced.

Pete Murphy
Author, "Five Short Blasts"

2:59 PM  

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