Ever since the federal government cut its various budgets for statistical releases in the 1990s, I’ve taken the announcements with a grain, sometimes a handful, of salt. Not only are they more prone to error, but I’ve long suspected they are sometimes tweaked deliberately. After all, GDP revisions are just about always downwards, creating the specter that the Commerce Department can take GDP out of a now-more-or-less-forgotten quarter and shift it into a quarter when it has more political value, say to shore up the stock market. Companies smooth earnings, so why shouldn’t the government?
Barry Ritzhold, in his blog The Big Picture, observes that of the 4th quarter 2004 GDP figures are sure to be revised downwards. I recall hearing the release (3.5% growth) and thinking it didn’t sound right, that the Christmas retail sales had been too weak for overall growth to be that robust.
Last week, we looked askance at the GDP release, noting that it did not comport with what we were seeing elsewhere. (Taking Apart Robust GDP Data). In January, we approvingly referenced Caroline Baum’s analysis (Q4 Data Doesn’t Add Up).
Those criticisms turned out to be dead on:
“U.S. wholesalers’ inventories took the biggest tumble in more than three years during December as overall demand for their goods raced forward.
Wholesale inventories decreased by 0.5% to a seasonally adjusted $393.76 billion, the Commerce Department said Thursday. November inventories rose by 1.1%, adjusted from a previously reported 1.3% climb.
The 0.5% decrease in December wholesale inventories surprised Wall Street, which expected a 0.5% gain. It was the sharpest drop since 0.6% in May 2003.”
Most recent data makes it apparent that Commerce data overstated Q4 GDP by as much as 100 basis points.
Here’s the math: the BEA assumed a 1% gain in inventory; Wall Street were looking for a smaller inventory build of 0.5 %. But Inventory was drawn down by 0.5%. That’s a full 150 basis point swing in the BEA data.
This presents a mixed economic picture. On the one hand (Damned two handed economists!), this means GDP in Q4 was nowhere near 3.5% — I suspect this will put us in the 2.5 – 2.75% range.
This isn’t the first time this has happened. The Commerce Department’s first report of GDP growth for the first quarter 2001 was 2.0%. I found it so incredible that I got on the phone to find out if anyone knew of any growth, since I saw no signs of life. I wasn’t alone in this reaction (see Larry Kudlow’s “Bogus GDP“). After two revisions, first quarter GDP stood at negative 0.6%.
Mind you, I’m not making any claims of expertise. Quite the reverse. Things are pretty bad when a layman can do the equivalent of sniffing the air and tell you that the stats are wrong.