The Economy Is Worse Than You Thought

Source: Decline of the Empire

It is bad enough that the economy sucks. This situation is made worse by easily discoverable distortions in official government statistics which downplay how much it sucks. (It’s suckiness?)

Mike Shedlock alerted us to such a distortion in U.S. Is In Recession, Right Here, Right Now. It seems that if you apply the Bureau of Labor Statistics official CPI-deflator to nominal GDP, instead of the BEA’s own deflator, the United States is in recession right now. Rick Davis of the Consumer Metrics Institute explains (via e-mail) what is going on, as do the two charts below from Doug Short (dshort.com).

During the past several quarters we have been persistently critical of the “deflaters” that the Bureau of Economic Analysis (BEA) has used to convert their “nominal” (current dollars) GDP data into inflation-adjusted “real” (chained 2005 dollars) data.

The logic of “deflaters” is simple: as you might expect the BEA can only capture production and consumption data in current (“nominal”) dollars, which are distorted over time by the impact of price inflation. To offset that distortion the BEA uses a set of price-indexes to “deflate” the “nominal” GDP into a “real” GDP that is then reported in “chained 2005 dollars” (i.e., all distortions caused by price changes since 2005 are in theory removed from the data before the “real” economic growth is reported).

Click to enlarge either chart. Graphs from Doug Short’s Will the “Real” GDP Please Stand Up?

The second chart, which uses the BLS CPI measurement to deflate nominal GDP, clearly shows that the United States is in recession. It also clearly shows that the economy has been far worse for most of the last 2 years than official reports indicated. Rick Davis provides a fair assessment of the government’s GDP story.

Quite apart from our concerns about the accuracy and delays in their “nominal” data, we have often found their “deflaters” lacking credibility — and in some cases egregiously so. And recently we have suggested that the entire reported annualized growth rates were merely artifacts of overly optimistic understatements of the actual inflation rates in the US.

Furthermore, major portions of the BEA’s recent massive downgrades to historical GDP growth rates were the result of restating historical “deflaters” to levels more consistent with the inflation data previously recorded by their sister agencies, constituting a tacit admission of their past tendencies to just such understatements of historical inflation.

The BEA always views the economy through rose-colored glasses. Is the BEA’s pervasive optimism bias a big problem?  More importantly, are these distortions deliberate? Or are they part of the tendency of humans to put a positive spin on everything they do, not matter how outrageous?

Taking the second question first, I imagine that the BEA statisticians are not corrupt, but have a certain way of doing things, no matter how absurd, and they cling to it in the usual way. In other words, that’s their story and they’re sticking to it. A change mandating the use of the CPI deflator would probably entail bloody bureaucratic wars which would takes years to resolve. There would be many casualties.

Whether these distortions to GDP are a big deal depends on how you view GDP. To those outside the consensual reality box, these discrepancies may not be all that important because such distortions are wholly expected. There are other valid ways to measure how the economy is doing. The BEA’s numbers are a form of propaganda.

However, for those inside the box, the GDP number is the single most important measurement of our economic health. Which means that every discussion of our economic health you read or hear in the media is complete bullshit.

If we can imagine the counterfactual world where the U.S. is in recession right here, right now, every single discussion, economic, political, or otherwise, and without exception, would be vastly different than the usual muddle-headed mush we hear now. So yes, from that point of view, these optimistic distortions to GDP are a Big Deal. But don’t expect a revolution in how Official Reality is reported. That would not be in the best interests of those who run this country.

Read more at Decline of the Empire