Thursday, October 30, 2008

The Government's Favorite Piece of Economic Data, GDP, Is Out

...since it serves to provide cover for government manipulations of the economy.

In fact, it is one of my least favorite data points.

The GDP contracted in the third quarter at a 0.3% annualized rate, we are told.

Final sales to domestic purchasers fell 1.8%, the largest decline in 17 years. Consumer spending dropped 3.1%, the first decline in 17 years and the biggest drop in 28 years, while business investment fell 1%. Investments in homes fell for the 11th straight quarter.

Among the multitude of problems with this data is that during a crisis period, such as we have now, the data are not correctly adjusted for the desire by many to hold cash balances. A house worth $400,000 in 2006, may bring the same psychic reward in 2008 when the house is worth $300,000. And, the house has just become affordable to many more! Yet,ten houses sold in 2006 at $400,000 would show income of $4,000,000. Eleven purchases of the same type house in 2008 at $300,000 would show income of $3,330,000. Thus, this would have a negative impact on GDP, when more people are now enjoying the luxuries of such a house!

Further, a considerable amount of what is labeled as "consumer spending", I would label as "capital goods investments."

Oscar Morgenstern did some early work (see his great book, On The Accuracy of Economic Observations)on the problems of the parent to GDP, GNP, but the full critique has yet to be written.

The only use I can find for declining GDP numbers is that they give the Federal Reserve a reason to inflate and regulate. An accurate report on the economy would show the economy in recovery from a period of central bank induced mal-investment. Such a report would show details of the readjustment process going on, not just a report on a declining aggregate.

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