Thursday, October 29, 2009

Strong GDP Report May Be Misleading

According to the first preliminary estimate, U.S. GDP rose 0.9% or 3.5% at an annual rate, compared to the previous quarter while falling 2.3% compared to a year ago.

If we are to believe the numbers then it was clearly a strong report. Yet there are reasons to believe that the numbers could exaggerate actual growth. That is because other numbers do not corroborate this fairly strong number.

For example, employment continues to drop. Production could expand even if employment drops if productivity increases, but if productivity increases so fast then how come real wages are falling? It would be possible with rising productivity and falling real wages if profits are soaring, but as I pointed out in the previous post profits are down sharply too. While the drop I discussed there referred to the yearly, and not the quarterly change, the yearly drop was not significantly smaller than in the previous quarter, making it unlikely that profits rose more than modestly.

For these reasons, it seems likely that real gross domestic income was stagnant (This is confirmed by the fact that the aggregate sum of the income components reported today (all except profits) fell even in nominal terms) and that the so-called "statistical discrepancy" continued to widen. It could of course be that it is gross domestic income that is too low, but it is likely mostly a case of gross domestic product being too high.