Keeping up with the Jones

[Al_U_Card]

Just when you thought that they had the recession beat......it was you that was scheduled for the beating! Enjoy.

 

 

Overstated GDP growth has meant that the 1990 and 2001

recessions were much more severe than recognized, and that lesser

downturns in 1986 and 1995 were more or less missed entirely.

 

Introduction

 

The Gross Domestic Product (GDP) is one of the broader measures of economic activity and is the most widely followed business indicator reported by the U.S. government. Upward growth biases built into GDP modeling since the early 1980s, however, have rendered this important series nearly worthless as an indicator of economic activity. The analysis in this Installment will indicate that the recessions of 1990/1991 and 2001 were much longer and deeper than currently reported, and that lesser downturns in 1986 and 1995 were missed completely in the formal GDP reporting process.

 

The distortions from bad GDP reporting have major impact within the financial system. For example, Alan Greenspan's heavy reliance on productivity gains to justify some of his policies is equally flawed,

 

With reported growth moving up and away from economic reality, the primary significance of GDP reporting now is as a political propaganda tool and as a cheerleading prop for Pollyannaish analysts on Wall Street.

 

Where average growth has been about 3.5% over the years ... most reporting is not statistically significant.

 

The upward bias shown in the revisions is due to what I call "Pollyanna Creep," where methodological changes regularly upgrade near-term economic growth patterns.

 

Lyndon Johnson kept sending the initial GNP estimates back to the Commerce Department for correction, he eventually got what he wanted, and the media dutifully reported stronger than actual economic growth.

 

Near the end of the first Bush administration, an outside-the-system manipulation was worked. A senior member of the Executive Branch approached a senior officer of a large computer company and requested that reporting of computer sales to the BEA be inflated. This was done specifically to help with the reelection effort. The request was granted, and thanks to the heavy leverage of computer deflation, reported GDP growth enjoyed an artificial spike.

 

There are suggestions of other direct manipulations over time, specifically involving the Clinton administration and the current Bush administration. Most recently, a bizarre annual revision to the GDP data eliminated the 2001 recession,

 

I respect the intellect and creativity of those who have anchored their careers in academia. Frankly, though, most economic theories have little practical use in the real world. Concepts such as free trade being a boon to the world's economy [5], a weak currency helping turn a nation's trade deficit[6], or personal income including what the average homeowner would receive from himself in rental income if he charged himself to live in his own house, fall in to the "not in the real world" category.

 

Free checking, for example, is calculated as imputed interest income.

 

Not only did imputed interest income account for 21% of all personal interest income in 2002, but also it grew at an annual rate of 8.3%!

As an aside, renting the house you own from yourself gets imputed as 62% of total rental income.

 

One of the deflation stars is the computer. While computer prices have come down over time, the quadrupling and re-quadrupling of memories provided with a standard computer have, through hedonics and quality adjustments enhanced the decline in prices used in deflating computer consumption in the GDP. According BEA deflators, $1,000 computers bought in 1990, 1995 and 2000 would cost $48.63, $95.84 and $526.58, respectively, today.

 

Varied academic theories, often with strong political biases, have been used to alter the GDP model over the years, resulting in Pollyanna Creep, where changes made to the series invariably have had the effect of upping near-term economic growth. [...] to capitalize rather than expense computer software purchases, or to smooth away the economic impact of the September 11th terrorist attacks, upside growth biases have been built into reported GDP with increasing regularity since the mid-1980s.

 

source data often are estimated without regard to actual numbers otherwise available

 

Although the BEA considers the IRS data, it never has been able to reconcile the differences between GDI assumptions and IRS reality.

 

In the introduction to this series on government reporting, I mentioned political manipulation of the GNP/GDP in the Johnson and first Bush administrations that went beyond overly positive methodological changes. In both instances, my sources were consulting clients who had been involved directly in the process.

 

Unfortunately, though widely followed, the series is probably the least meaningful of the major economic statistics followed by investors and the financial media.

 

 

http://www.shadowstats.com/article/57

[Al_U_Card]

And then there is this...

 

Elements of the Consumer Price Index (CPI) had their roots in the mid-1880s, when the Bureau of Labor, later known as the Bureau of Labor Statistics (BLS), was asked by Congress to measure the impact of new tariffs on prices. It was another three decades, however, before price indices would be combined into something resembling today's CPI, a measure used then for setting wage increases for World War I shipbuilders. Although published regularly since 1921, the CPI did not come into broad acceptance and use until after World War II, when it was included in auto union contracts as a cost-of-living adjustment for wages.

 

The CPI found its way not only into other union agreements, but also into most commercial contracts that required consideration of cost/price changes or inflation. The CPI also was used to adjust Social Security payments annually for changes in the cost of living, and therein lay the eventual downfall to the credibility of CPI reporting.

 

Let Them Eat Hamburger

 

In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.

 

Although the ensuing political furor killed consideration of Congressionally mandated changes in the CPI, the BLS quietly stepped forward and began changing the system, anyway, early in the Clinton Administration.

 

Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

 

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

 

The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.

 

Shortly after Clinton took control of the White House, however, attitudes changed. [...] The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

 

The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

 

Hedonic Thrills of Using Federally Mandated Gasoline Additives

 

Aside from the changed weighting, the average person also tends to sense higher inflation than is reported by the BLS, because of hedonics, as in hedonism. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

 

rising gasoline prices never seem to get fully reflected in the CPI, but the declining prices sure do

 

How Can So Many Financial Pundits Live Without Consuming Food and Energy?

 

The Pollyannas on Wall Street like to play games with the CPI, too. The concept of looking at the "core" rate of inflation - net of food and energy - was developed as a way of removing short-term (as in a month or two) volatility from inflation when energy and/or food prices turned volatile. Since food and energy account for about 23% of consumer spending (as weighted in the CPI), however, related inflation cannot be ignored for long.

 

Nonetheless, it is common to hear financial pundits cite annual "core" inflation as a way of showing how contained inflation is. Such comments are moronic and such commentators are due the appropriate respect.

 

The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported.

 

 

http://www.shadowstats.com/article/56

[Al_U_Card]

Speaking of recessions......I wonder why....

 

Bush Takes Credit for Sunrises and Job Growth

 

President Bush boasted yesterday that his economic policies had led to a record 52 months of consecutive job growth. The WSJ dutifully reported the boast. It didn't bother to point out that President Bush has the worst record on job growth of any post-war president, with the most recent jobs report pushing the rate of job growth in his administration below the dismal record under his dad.

 

The economy creates jobs. It's just like the sun rising. Unfortunately, people are more familiar with the pattern of sun rises than they are with economic trends, that is why reporters are supposed to explain to readers that boasts like the one made by President Bush are ridiculous. I have pasted below the rate of annual job growth under the presidents since 1960:

 

Kennedy-Johnson -- 3.3%

Nixon-Ford -- 1.9%

Carter -- 3.0%

Reagan -- 2.1%

Bush I -- 0.6%

Clinton -- 2.4%

Bush II --0.6%

(Source: Bureau of Labor Statistics.)

 

 

Or do I?