Reply #1: Market WrapUp: An Inconvenient Adjustment: [View All]

[ozymandius]

The Unofficial Official Recession
BY CHRIS PUPLAVA

The advanced estimate from the Bureau of Economic Analysis showed Q1 real GDP coming in at a 0.60% annualized rate, slightly higher than the 0.58% annualized rate seen in Q4 2007. With real GDP still in expansionary territory, the U.S. economy has not entered an “official” recession, which is defined as two consecutive quarters of negative real GDP growth.

Not so fast! Nominal GDP is adjusted by the GDP deflator to measure real GDP growth with the inflation component removed to measure the increase in economic output and not an increase in the level of prices. However, one must take a metric ton, not a grain of salt, when looking at the GDP deflator. The GDP deflator has been consistently below the stated inflation rate as measured by the headline CPI numbers, with a lower GDP deflator leading to a higher real GDP number.

Call my a cynic but I can’t help but notice the CONVENIENT deviation between the headline CPI inflation rate and the GDP deflator during periods of economic weakness. Remember, a lower GDP deflator leads to a higher real GDP number. Well, it just so happens that the deviation between headline CPI and the GDP deflator often peaks during economic recessions so that the reported real GDP numbers are higher than what they would be if nominal GDP were to be deflated by the headline CPI.

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Harper’s Magazine had an excellent article written by Kevin Phillips highlighting all the governmental changes made to how the CPI is calculated in an article entitled, “Hard numbers: The economy is worse than you know.”

…Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range).

Let me stipulate: The deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms.

The political blame for the slow, piecemeal distortion is bipartisan — both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt and a casino-like financial sector. To see how, we must revisit 40 years of economic and statistical dissembling.

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Clearly the economic picture has deteriorated for the average American Consumer. Anyone claiming that the U.S. is currently not in a recession is in pure denial as we are already unofficially in an official recession. The announcement of an official recession is irrelevant at this point as the deteriorating economy will make it abundantly clear to all, regardless of what inflation measure is used to deflate nominal GDP. The consumer is under severe stress and a plummeting labor market will only weigh further on consumption as retail sales are strongly correlated with changes in employment.

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