Last year, we put America on Banana Republic watch, and sadly, things appear to be playing out as we feared:
I’m certain you’re familiar with the expression “death wish.” I am beginning to wonder whether America has a banana republic wish. The country has been taking steps towards being a small-minded, elite-dominated, sham democracy.
Mind you, I am pointing to a tendency, not an established fact. The US isn’t Haiti, or even Argentina. But we are moving in that direction on a variety of fronts, and the devolution seems so concerted that I wonder if there is some unconscious mass desire to give up on the messiness and ambiguity of an open society and surrender to the certainty of one with institutionalized inequality, more authoritarianism, but more predictability, and perhaps an illusion of greater security.
What triggered this line of thought? Something surprisingly minor: the April employment report,…But even this disappointing figure may have been the product of manipulation, as we will discuss in due course. And we’ve now had so many instances of what charitably may be called artful reporting that it’s beginning to undermine my faith in government statistics. Unreliable government statistics are a Banana Republic Indicator….. the integrity of that data is becoming compromised on enough fronts so as to render them suspect. And inaccurate data leads to bad business and bad policy decisions. Bad policy decisions are particularly likely since the information is massaged so as to minimize unpleasant news.
What is remarkable is that today’s 2Q GDP revision. from a 1.9% that most observers regard as likely to be revised downward (and initial releases are often revised by significant increments), has now been revised to a simply not credible 3.3%. We’ll discuss in a bit how this artwork was achieved.
Yet what is more remarkable is that a quick read of the MSM (Bloomberg, Financial Times, the Wall Street Journal, and the New York Times) reveals that no source seems willing to challenge this practice and call it for what it is, manipulation for political purposes. Some economists quoted by the MSM instead politely chose to ignore the dead body in the room and argue, essentially, that this supposed data point was irrelevant as far as the outlook was concerned. Here we see some tiptoeing around the tulips quotes:
Bloomberg: “Outside of trade, the economy is considerably weaker,” said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. “When you look at the spending, it looks terrible for the second half of the year.”
Reuters: “This number seems to overstate the underlying strength even though exports are obviously strong,” said James O’Sullivan, an economist at UBS Securities in Stamford, Connecticut.
Now of course, there is good reason for less than a full-bore assault. One is that by the time someone made all the Freedom of Information Act filings to get enough of the supporting work to prove this number was massaged, we’ll be not just into the next Adminstration, but into the recovery. Second, economists are supposed to be sober and analytical. Stirring controversy is not part of their job description.
Nevertheless, there were quarters in which doubts were expressed more strongly. Zubin Jelveh at Portfolio provided this quote:
RDQ Economics: “The strength of the economy in the second quarter suggested by the expenditure estimate of real GDP growth seems truly bizarre and is a product of a declining real trade gap.”
Bloggers, needless to say, were less inhibited, with Barry Ritholtz, long on the bogus statistics beat, leading the charge:
GDP is out, ticking higher to 3.3% rather than 2.7%
And if you believe that data, I also have a bridge for sale in Brooklyn.
Why the beat on the headline figure? Aside from the usual inflation nonsense, there were two other factors: Exports, which rose to 13.2% (versus earlier reported 9.2%) and Inventories, which also played a part in the apparent strength.
My fishing buddy John Silvia of Wachovia put it into context:
“The overwhelming story is that the export numbers have offset this domestic weakness in consumer spending and business investment. We have a domestic recession.”
Also worth noting: larger than earlier reported gains in every single government expenditure category. If you are wondering why the government does not know what it is actually spending in near real time, welcome to the club.
That boldface was mine. If that isn’t sus, I don’t know what is.
Barry in a later post, with the help of a chart provided by Michael Panzner, found the real smoking gun: a laughable assumption for inflation. The lower the inflation assumption, the higher the GDP figure. Not only was the 1.2% chosen lower than CPI, which has been adjusted over time to underreport inflation so to reduce payouts on CPI-indexed programs, most notably Social Security, but as a commentor on Econompics noted, constituted the biggest gap between the GDP deflator and CPI since 1980 (squinting at the chart, that seems to be accurate):
Refreshingly, some in the MSM are coming close to doing so. This story in Bloomberg, “Lagging Incomes Signal U.S. Economy Weaker Than GDP Suggests,” which came out within hours of the release, discusses the disparity between incomes data and GDP without taking on the GDP report frontally. That’s a step in the right direction.
The meager gains in earnings over the last year signal the U.S. economy is in much deeper trouble than the growth estimates indicate, economists said.
Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating gross domestic product, rose 0.3 percent in the 12 months ended in June after adjusting for inflation, according to Bloomberg calculations based on today’s Commerce Department growth report. GDP expanded 2.2 percent.
“The income side of the economy, with profits down for four straight quarters and employment falling, looks like a recession,” said John Ryding, chief economist at RDQ Economics in New York.
Incomes last quarter grew 1.9 percent at an annual rate after adjusting for inflation, a little more than half the 3.3 percent gain posted by GDP, according to Bloomberg calculations. The figures showed incomes dropped in each of the prior two quarters.
“What you are seeing is more legitimate economic weakness in the income numbers,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “The GDI numbers raise the potential that GDP is overstating growth.”
The 1.9 percentage-point difference between the GDI and GDP over the last 12 months is the biggest in the post World War II era…..
The income numbers are more in line with other figures that indicate the economy struggled from April through June. The jobless rate was 5.5 percent in June, up from 5.1 percent at the end of the first quarter, and employers cut 165,000 workers from payrolls, according to the Labor Department.
“I’m looking at the labor market, and the GDP income numbers make more sense,” said Ryding. “It certainly did not feel like 3.3 percent growth.”
The earnings data may more accurately predict the start of economic contractions, according to researchers at the Federal Reserve.
Income adjusted for inflation “has done a better job recognizing the start of recessions than has the growth rate of real GDP,” Jeremy J. Nalewaik, a Fed economist wrote in a December 2006 report. “Placing an increased focus on GDI may be useful in assessing the current state of the economy.”
While the income and growth figures should theoretically match, the different methods used in calculating the numbers prevent them from converging fully.