GDP Release Signals Further Decline into Banana Republic Status

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):

Mind you, this massaging is taking place on top of long-running adjustments that make both GDP and inflation stats questionable. Is it time to revive the 1960s expression “credibility gap“?

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.

From Bloomberg:

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.

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  1. Anonymous

    I have also recently read allegations that Hank Paulson is stockpiling expensive khaki pants, mens moisturizer, and an entire shipload of earth-tone polo shirts in this quest for Banana Republic status for the US.

  2. Anonymous

    No doubt about it and I think we have already passed into one. As a trader and market observer watching the markets daily and some of the shenanigans going on to prop them up there is no question in my mind. The US is a banana republic and also an empire in the process of collapse under the weight of to much debt.

  3. Anonymous

    Some don’t seem to understand what the GDP covers or what the GDP deflator measures. GDP covers more than the US consumer – GDP and its growth include the contribution of net exports. And exports have been undergoing disinflation due to the cheaper dollar. This brings down the deflator.

    In other words, the proper inflation measure of GDP includes the effect of prices on foreign buyers as well as American consumers.

    It’s an open economy after all.

    One of the bloggers you quote is also famous for promoting the idea that the measurement of savings is wrong because it doesn’t include marked to market changes for assets.

    Similar errors – the problem lies in not understanding (or being unwilling to understand) what the scope of the measurement is intended to be.

  4. Genesis

    Psst – in the BEA report dissected in my blog there is this little gem of a claim that financial firms had huge profit increases in both Q1 and Q2.

    Does anyone believe that?

    Oh, and don’t pay attention to the deflator for non-financials. Its negative.


  5. Yves Smith

    Anon of 10:07 PM.

    With all due respect, with an export sector of roughly 15% of GDP, it is well nigh impossible to reconcile a 2Q GDP deflator of 1.2% with a CPI-U running at 4.3% over the last year (and stronger appreciation in 2Q) and a PPI rising at 8.9% in the last year (and again, faster in 2Q).

    Nor is there any reason to expect that exports are decreasing their prices in dollar terms. A weak dollar in fact permits them to increase prices in $; that’s an oft-cited worry, that manufacturers become fat and lazy with a weak currency, either increasing prices and fattening their margins, or simply failing to innovate since the price advantage lessens the pressure to improve features or quality.

    Further, as we noted in a recent post, policymakers are worried that much of our export gains are skewed towards commodities, not finished goods. You’d need to look at a US basket of commodity exports to come up with the right number to determine how their prices changed over the quarter.

    Nevertheless, I imagine most readers of this blog would be delighted to bet $100 against you that US commodity export prices overall fell in dollar terms from the end of 1Q to the end of 2Q. The dollar rally did not occur until July.

    The fact that Barry Ritholtz is off the mark upon occasion does not refute any of the arguments of his cited above.

    And that marvelous tidbit from Genesis, that the deflator for non-financials was negative, says how dubious this entire exercise is.

  6. David

    Tell me it ain’t so. I heard the wildly optimistic ‘growth’ figure and wondered what country I am in.

    Political manipulation?

    However, perhaps the overwhelming profits in commodities (oil especially_) and estimated profits from future uncollected loans are skewing the figures. One gal making a million an hour makes 10,000 guys look like they’re doing well even if they are losing individual income while they are included in the same quantity averaged with the million an hour person. That’s the law of averages. Just a few wild successes make the whole pie look good. We know how a few Mobile Exxons are doing. Of course 10,000 small businesses are failing at the same time but that’s statistic not parsed in the overall “growth”.

    Growth like this reminds me of cancer.

  7. curious-er

    Genesis, I also noticed the alleged profit increases for the financials and commented on it on the CR blog, but it didn’t seem to register there. How in the world anyone can come up with a *profit* for these guys is incomprehensible to me–maybe someone can explain?

  8. tyaresun


    Have you had a chance to look at the GDP deflator discussion over at Econbrowser? If yes, care to comment on that?

  9. Anonymous

    Financials offload so much crap to the Fed windows (and the feds aren’t sharing worth values) and went short commodities (on the naked short bust) that everyone should be buying financial stocks for the future returns. sarc/off

  10. Anonymous

    menzie chinn i thought had a nice, balanced take, while merrill lynch’s david rosenberg was quite critical if you can get a hold of the report; here it is in a nutshell:

    So let’s get the picture straight:

    To believe in today’s revised GDP data, we have to believe that…

    1. We are seeing near-record deflation in the nonfarm nonfinancial corporate sector.

    2. We are seeing double-digit earnings growth in the financial arena.

    3. Productivity growth is running at a near-3.5% pace and as such, “potential” GDP growth is close to 5% (we’d like to believe that, but it can’t be true).

    4. Unit labor costs in the nonfarm nonfinancial sector were actually declining at a 2.2% annual rate in the second quarter (again, being bond bulls, nothing would make us happier if this were all true),

    5. Somehow, in a quarter which saw the CPI rise at a 5% annual rate and PPI up by more than a 10% annual rate – both accelerating over the 1Q runup – the GDP price deflator managed to decelerate from a 2.6% annual rate in 1Q to a 1.2% annual rate in 2Q, the softest economy-wide inflation print in a decade (and recall, the 2Q ends in June when the commodity bubble was just about to reach its climax).

    We are non-believers…

  11. Anonymous

    You need look no further than CNBC to see the end is nigh.

    “Economy strong, but feels like recession, which it is”

    So this is how outsourcing and productivity gains translate into a declining standard of living while Larry Kudlow and Bill Gates get to crap on all the rest of us. Let’sface it. WE KNOW WHERE THE MONEY IS! IT’S TIME WE TAKE IT BACK FROM THESE MONSTERS. THEY CREATE NOTHING! They should be spit on!

  12. Anonymous

    “A weak dollar in fact permits them to increase prices in $; that’s an oft-cited worry, that manufacturers become fat and lazy with a weak currency, either increasing prices and fattening their margins, or simply failing to innovate since the price advantage lessens the pressure to improve features or quality.”

    That is sooo true.

    Of course, we need to limit compensation on Wall Street to say $1 million a year to keep those guys from getting “fat and lazy and failing to innovate”.

    If we keep letting them rake in 8 and 9 figure bonuses they will keep turning out garbage financial products like CDOs, CPDOs, RMBS, SIVs, etc. Clearly strict regulation of compensation will improve the quality of financial products.

    It will also make the Manhattan real estate market a lot more affordable.

  13. Anonymous

    The growth of The American enterprise is directly related to the health of the mechanics that drive the internal combustion of the government printing press. Relax man, they have this under control!

    Re: Excluding Zimbabwe, the GDP growth forecast for the region in 2008-2009 is at 7.9 percent, according to SADC executive secretary Tomaz Salomao.
    While substantial recent growth was recorded in Angola, Malawi, Mozambique and Tanzania, real GDP growth for the SADC region increased by 5.9 percent in 2007, virtually unchanged from 2006.

  14. Anonymous

    Economics are politics.

    The golden rule: The man with the gold makes the rules.

    Want to know why? Follow the money.

    Politicians lie.

    What is scaring me is they(govt) don’t seem to even care anymore. The numbers are massaged, rules are changed at will, contradictory statements are made within days by the same leaders and they don’t even bother to refute the previous “truth”.

    I feel we are building towards some crescendo. I hope it doesn’t become a dirge.

  15. Yves Smith

    I’d do more spadework, except I need to get to new posts. But let me throw out a couple of ideas on why financial institutions showed an increase.

    A considerable part of reported GDP is in fact not actual transactions, but imputations. This is from a 2005 post by Michael Shedlock:

    Imputations are a part of GDP that the government decides to estimate value, where no cash actually changed hands. In other words, if I scratch your back and you scratch mine but no one gets paid, then back scratching is undercounted in the GDP. Clearly it would be a travesty of justice if economic activity like that was under reported in the GDP. It goes far beyond that however, into complete fairy tale absurdities. For example: If you own your own house, the government recalculates your income as if you were really renting from yourself and paying yourself rent! In light of some earlier sarcasm you might think I am making this up but rest assured I am not.

    Imputed rent just happens to be one of the most frequently asked questions of the BEA. Here is their response: The BEA treats homeowners as businesses, which pay rent to themselves. Therefore, homeowners contribute to the real estate industry’s GSP even if not employed by the industry. In addition, like businesses, homeowners’ property taxes paid to state and local governments are included as part of real estate TOPI.

    You can go here and eyeball how significant the imputations are. Owner occupied rent is the biggest, but I also am under the impression that some imputations relative to financial services are significant too. Free checking is a biggie. A value is attributed to your “free” service (as if the bank hadn’t figures out a way to make a buck from it, as in via the float on transactions) and added to GDP. Not sure what other imputations there are in financial services.

    The other big question area is how they treat writeoffs. Betcha that would explain a lot….

  16. Anonymous

    Does anyone know if the $200 Billion The Fed handed out to banks back in March finds its way back into GDP?

  17. Anonymous

    The GDP price deflator can be disaggregated into price deflators for personal consumption, capital goods (including housing), government, and trade. The personal consumption component was 4.1 percent, comparable to the CPI. The question is, how much of that was due to imports. By BEA’s calculation, quite a bit. That, and lower inflation for capital goods (and a decline in the housing component) was what lowered the overall GDP deflator. Remember, it’s a deflator for domestic production, so if the price of cars goes down, then that lowers the GDP deflator, even as the price of oil goes up.

    As a small cog (and at the state level) of the machine that cranks out economic statistics (in my case labor market), maybe I’m naive but I don’t think my fellow low-level bureaucrats “cook” the numbers to please the higher-ups running the country. We follow our methodologies (criticism of which is fair game), but we don’t manipulate the numbers that come up. That’s my experience, anyway, and I would be greatly saddened to find otherwise.

    So I will continue to believe (again, maybe naively) that it is possible that we had positive GDP growth due to an improving trade deficit and the rebate bump, while for the average person things got worse due to higher prices, stagnant wages, and growing unemployment. This is probably a one-quarter aberration, and certainly not what I expected, but the world is full of surprises, no?

  18. Anonymous

    You’re right regarding export pricing.

    I should have said (consistent with the sentence preceding it):

    “And NET exports have been undergoing disinflation due to the cheaper dollar.”

    This is a roundabout equivalent way of saying that import inflation gets backed out of the deflator calculation, in the same way that imports are backed out of the GDP calculation (via (E – M)). This has quite an effect because of the impact of the decline in the dollar on import prices, plus the fact that the US is running a current account deficit where imports obviously weigh more heavily than exports. And the dollar was weaker during Q2 as you pointed out. So the embedded import component of CPI inflation doesn’t show up in the deflator. Provided gross export pricing isn’t inflating too much, as you suggest could happen, it’s effect may not be that material to the total net export (GDP component) effect on the deflator, most of which is effectively contributed by subtracting import inflation.

    anon 10:07

  19. Anonymous

    This confirms that we are not in a recession! We have to believe that damn it and lies be damned!

  20. Anonymous

    “The other big question area is how they treat writeoffs.”

    Maybe asset write-offs are treated as capital transactions rather than (negative) income, and therefore don’t enter into GDP calculations.

    anon 10:07

  21. Yves Smith

    I suspected that, but the logic in financial regulation and accounting land is that you take loan loss reserves to make sure you are allowing properly for losses on an ongoing basis. Loan losses are not a catastrophic event, like a factory fire or an earthquake. They are part of doing business and should be counted as an expense.

    In fact, when corporations announce writeoffs, the complaints are similar: it means that profits were overstated in past periods and in theory the books should be redone. But no one does that.

  22. Stuart

    Yves, great analysis, great comments. You reply to Anon @ 10:07 though was very disturbing, in terms that it was EVEN NECESSARY.

    “With all due respect, with an export sector of roughly 15% of GDP, it is well nigh impossible to reconcile a 2Q GDP deflator of 1.2% with a CPI-U running at 4.3% over the last year (and stronger appreciation in 2Q) and a PPI rising at 8.9% in the last year (and again, faster in 2Q).”

    This is so blatantly obvious that it is frightening this has to be pointed out. OMG. This typifies the struggle in the media these days when people cannot break their headlock and think for themselves. I still cannot believe you had to point this out. They actually rationalized 1.2%…. Talk about an argument against democracy.

  23. Anonymous

    Yves 1:30

    I don’t have the answer, but setting up the macro accounts requires some consistency of framework between the notion of the “asset economy” versus the GDP economy. Housing prices don’t factor into the GDP economy (except on new construction). Equity prices don’t factor into GDP. Capital gains and losses in general don’t factor into GDP, which is why they don’t factor into savings, which is defined based on income. etc. etc. etc. So the question is how do bank asset write-downs factor into GDP and is this consistent with the treatment of other asset value changes that don’t factor into GDP. Another question is whether these securities write-downs are treated the same or differently than regular type loan losses.

    I think it all gets down to the issue of marked to market and its relationship to national accounts income. E.g. capital gains cannot be associated with real investment in the same way that national accounts saving is – because real investment as a new output does not generate income at the macro level to its factors of production in the form of capital gains.

    p.s. Stuart, you’re a genius

    p.p.s. Yves, don’t reply to this if your credibility is further jeapardized

    anon 10:07

  24. Yves Smith

    10:07, you are right to suggest that the mark-to-market framework is not appropriate for national income accounts.

    The problem is that the distinction between assets and income is not neat and tidy. For instance (I cannot think of the term of art, but CDS people will hopefully chime in), traders would enter into certain CDS transactions that would earn a spread over the life of the trade. They would then get a monoline guarantee to let them eliminate the default risk. With a AAA guarantee, you could accelerate the profits over the life of the deal into the current period for accounting purposes.

    I am pretty sure those profits were counted in GDP.

    Now the monolines have lost their AAAs. That acceleration is now bogus. I am not sure how it gets undone, but I am pretty sure the profits get reversed somehow, most likely via a writedown.

    This is a clear asymmetry. The GDP contribution should be reversed, and I strongly suspect it wasn’t.

    Or consider the Merrill super-senior CDOs. They took underwriting profits on those deals, but were left with tons of unsold inventory. That’s the stuff they just unloaded for a reported 22 cents on the dollar, really less, since the sale was financed and they may not get any more than the cash payment (25% of the nominal price) . Now the losses on the inventory greatly exceed whatever manager fees, underwritng and selling concessions they got on those deals. In theory, you ought to look on a product/deal basis. Thus the nominal profits on those deals were phony and should be reversed. But they weren’t.

    I am sure readers can come up with lots of other examples. These financial assets are inventory. Businesses take inventory writeoffs as an operating expense, not a capital loss. If inventories are being treated as capital assets, particularly in this day of frequent trading, we have a problem.

    The usual accounting standard is that if something is expected to be held more than a year, it is an asset. otherwise, it’s inventory. Those Merrill CDOs were not intended to be held a year (the very fact that they were not sold quickly, even at a loss, and Merrill kept doing more deals and racking up more inventory says management was horribly remiss). I suspect that the BEA does not have the bandwidth to inspect expected holding periods and some (many?) of its assumptions are outdated.

  25. rootless cosmopolitan

    The GDP number looks like an statistical artifact to me, if it’s not deliberately manipulated, considering that other indicators are deeply in recessionary territory as well as the discrepancy to the GDI number.

    However, I still think trying to make an argument with the gap between the CPI number and the GDP deflator is fallacious, since the CPI does contain import inflation, but the GDP deflator doesn’t.

    From the latest release of the Bureau of Labor Statistics:

    “During the first seven months of 2008, the CPI-U rose at a 6.2 percent seasonally adjusted annualized rate (SAAR). This compares with a 4.1 percent increase for the 12 months ending December 2007. The energy index rose at a 33.1 percent SAAR in the first seven months of 2008 after increasing 17.4 percent in 2007. Gasoline prices increased at a 35.2 percent SAAR in 2008 after a 29.6 percent increase in 2007, while natural gas prices rose at a 71.3 percent SAAR after decreasing 0.4 percent in 2007. The food index has increased at a 7.6 SAAR for the first seven months of 2008 after increasing 4.9 percent in 2007. Excluding food and energy, the CPI-U has advanced at a 2.5 percent SAAR following a 2.4 percent increase in 2007.”

    Further above they also say that price increase in energy made half of the All items increase in July 2008. The increase of energy prices was also huge in May and June according to the table.

    You would have to show that there is a significant gap between CPI minus import inflation and GDP deflator to make the argument.


  26. Yves Smith


    First, the producer price index is rising much faster than CPI. I mentioned both, and PPI is if anything more germane to GDP than CPI is, and PPI is running at 8.9% over the last year.

    Second, the ex-food, ex energy (and remember, most consumer food is produced domestic, so that high inflation component goes back into GDP) was 2.5% for the first seven months. As we noted CPI and PPI #s were both higher in the second quarter than the first, so round up that 2.5% a tad, Even if you work from that rather than an adjusted PPI figure, there’s still a big difference between 2.6% or 2.7% and 1.2%.

    How do you make the math work? Take what is left of a consumer’s budget ex food and energy. How do you get from a 2.6% increase to 1.2%? It can’t be imports, the dollar was weakening during this period so they’d be increasing in price. China was loosening its peg. The only major currency I can think of that weakened versus the dollar was the yen, and Japan doesn’t export much in the way of consumer goods to the US directly. They have extended supply chains, and from what I hear from Sony, the rise in fuel prices has hit them hard and they are rethinking their manufacturing and distribution.

    Third, imported fuel costs appear to be being passed on to some degree in service costs, so treating fuel as if it is excluded entirely from the computation isn’t correct. Fedex, airlines, and some on-line retailers have increased their charges. I hear of yard men and cleaning women asking for more and often using their driving costs to make the case (I’m sure its a general cost of living issue, but that helps make the sale). Services are spotty and some like banking are not affected at all by fuel charges, so it is hard to reach conclusions here.

  27. doc holiday

    Sorry I caught this fish so late, but check this out:
    August 05, 2008
    June's personal income and outlays report showed a 0.8% month-over-month surge and a 4.1% annual increase in the PCE deflator, while the core PCE deflator rose 0.3% from the previous month and 2.3% from a year-ago. The annual rate of the core personal consumption expenditure index is clearly above the Fed's comfort zone of 1%-2%.
    Meanwhile, the economy is going through a swoon. Standard & Poor's believes that a recession started in December 2007 and is expected to last until April 2009, which would make it 16 months long and equal the two longest recessions since the World War II in the mid 1070s and 1980s. The firm estimates that GDP will decline in the fourth quarter of 2008 and the first quarter of 2009 following which the economy is poised to see a slow recovery. However, one consolation is that most economists expect the recession to be shallow due to the concerted actions by the Fed and the government.
    The Commerce Department revised down its estimates for fourth quarter GDP of 2007 to a small negative growth. Economists feel the contraction is too small and too brief too call a recession. The second-quarter GDP rose 1.9%, slower than the consensus estimate of 2.3%, but it was adequate to be termed a solid bounce back achieved on the back of the economic stimulus package.

  28. doc holiday

    Probably too late for a mystery here, but below are two mutual funds that essentially seek to make dough by shorting 30 year treasuries; unfortunately for them, they have been crushed since about 2002, which indicates that 30 year yields would be going up. However, one part of this mystery is explained here: The 30-year Treasury constant maturity series was discontinued on February 18, 2002, and reintroduced on February 9, 2006. ( )

    The 30 year Treasury yield 2002-02-01 was 5.40%, yesterday it was at 4.37%.

    The 10 year yield on 02/2002, it is recorded @ 4.91% and of course today it is at 3.7950%, thus, if you would have short short term Treasuries, all would have been fine, but for some reason, I'm starting to wonder how this changes the shape of the yield curve? As I posted earlier:

    Separately, the Federal Reserve said Monday that the average yield for one-year Treasury bills, a popular index for making changes in adjustable rate mortgages, dropped to 2.12 percent last week from 2.18 percent the previous week.

    1. Rydex Inverse Gov Long Bond Strategy Inv

    The investment seeks total return, before expenses and costs, that inversely correlates to the price movements of the 30-year Treasury bond.

    2. ProFunds Rising Rates Opp Inv

    The investment seeks daily investment results that correspond to 125% of the inverse of the daily movement of the most recently issued 30-year U.S. Treasury Bond.

    ***Never mind…….. Ill think this over later, but if this rings a bell for someone, feel free to jump in!

  29. anon 10:07


    I think you must be right generally on the asset versus income measurement dilemma, and its relevance for GDP construction, particularly in the case of financial institutions.

    Returning to the more general issue of the deflator:

    Import inflation as a component of the GDP deflator is explicitly negative, assuming import inflation itself is positive, because imports are a negative component of GDP (i.e., as in C + I + G + E – M).

    Just as imports constitute either final products or are embedded as components in final products purchased by US consumers, so is import inflation embedded in the final inflation seen by them.

    CPI is a measure of inflation of the total final product purchased by the US consumer. The GDP inflator, by excluding import inflation, is effectively a measure of inflation of US value added, where value added is interpreted broadly across all GDP products (i.e. domestic and export); e.g. many domestic services and products would be “100 per cent US value added”.

    Returning to the explicit subtraction of import inflation, there is also an explicit measure of import inflation. It is absolutely massive at this time and has been accelerating. I don’t have access to it right now, but I’m certain that it is currently closer to 20 per cent than 10 per cent.

    This is a huge number. It is a direct factor in CPI inflation, but is subtracted from the deflator. And it is big enough to constitute huge leverage in the difference between the two. And, as you say, the dollar was weakening over Q2, which provides considerable leverage to the result in terms of the change in the deflator, and/or a change in the difference between the deflator and CPI.

  30. anon 10:07


    There is arguably a dark side of the economic/financial blogosphere, where the boundary line between the light and the dark is defined roughly as follows:

    The light includes most professional economist bloggers AND some other bloggers who analyse economic data according to the intended design of its architecture. They interpret data where necessary by noting unusual features in the design (e.g. the apparently perverse but explainable nature of the GDP deflator).

    The dark includes the others, who repeatedly reject the validity of the incoming data, because the data don’t conform to their own pre-conceived idea of a natural architecture. And they refuse to interpret in context. This dark side is viral. It’s viral not only for the bloggers, but for the readers, and for the symbiosis of the two.

    You are one of the pre-eminent bloggers in the total sphere. I have a feeling you will reject my classification idea outright. But if you think there is anything valid in it at all, I would hope you believe yourself to be in the light, and where necessary, shining a light into the dark.

  31. anon 10:07


    Just a note on the issue of imputed rents: I tend to get my data second hand but I think this is an enormous item in the GDP calculation.

    I see nothing wrong with the idea. If everybody who now owned their house sold for cash and rented (while buying others as investment properties), the entire housing stock would generate rent as both income and expense.

    The total income side would certainly need to be included in GDP accounting. Some of it would still be in the form of business income, and household rental income should be included for factual completeness in any event. And if it is included in such factor income, it must be included as an output that attracts expenditures.

    Conversely, if everybody who now rented bought their house, the entire housing stock would generate 0 explicit rent as either income or expense.

    In one case, all housing assets have a value that is expressed explicitly in the form of income. In the other, all housing assets have a value that is explicitly capitalized.

    The economic substance remains the same; only the pricing has changed.

    To be consistent, there are only two choices for GDP accounting (which is income rather than asset based):

    a) Ignore the income and the expense in both cases


    b) Capture income and expense in both cases – one explicit, the other implicit (i.e. imputed).

    Given the actual income cash flow in the rental case, it makes sense to include it in GDP.

    Therefore, it makes no sense to choose a) above.

    The provision of a service for rental is easy enough to visualize in either implicit (imputed) or explicit terms.

    And the seamless treatment makes economic comparisons more valid when the economy is shifting between owning and renting.

    So a very large imputed rent number must be kept in mind when analysing GDP.

    p.s. I was somewhat clumsy and simplistic in my dark/light note above. I really meant to suggest such a dividing line only in the dimension of data interpretation and not with respect to blogging quality in general.

  32. David


    I love that Word!

    thx, Yves!

    (for the financially ignorant like me, that word is priceless as intuition tells me that it’s exactly how Financial Houses are projecting their profitability for the rest of us.)

    My car mechanic let his 401K ride in a bank CD and did much better than the brokers did with mine. His faith might be rewarded but even that could be in doubt now that banks are threatened with high outlays for ‘insurance’ we can see that Peter L. Bernstein’s faith in basic Treasury notes as the only stable money sink left.

    sorry for non sequitars and misspellings.

    Imputations! Priceless!

  33. Anonymous

    Imputations, hedonics, and other pieces of the architecture for government statistics might seem quite elegant to theoretical economists; but, as they drive greater and greater pieces of what gets reported as GDP, CPI and so forth we, in effect, mis-account to ourselves.

    It’s as if our whole economy and future get played out as if everything was a Level 3 asset.

  34. Stuart

    Anon 10:07, perhaps. One wonders who your intended audience is as you must think Yves doesn’t know the formulas. Half of CPI is not credible. Period.

  35. anon 10:07


    My intended audience is anybody who doesn’t appreciate that the GDP deflator is intended and designed to measure a very different scope of inflation than the CPI. The result is a potentially glaring difference between the level of the two measures, particularly in the case of a country with a large current account deficit and a significant rate of imported inflation. I’m making the comment generally without directing it specifically to Yves, who can speak for herself. And this isn’t to say there aren’t other contentious issues specific to either measure.

  36. Anonymous

    Yves, I’m not sure why you maintain that the PPI is more germane to GDP. Intermediate products aren’t included in GDP, only final products. That the PPI is rising should be picked up in future CPI. And to the extent that the PPI is going up due to higher costs of imported materials (e.g. oil), then those costs should be factored out–we’re talking about domestic production.

    I do agree with you that figuring out GDP (and productivity as well) for the financial sector is particularly murky.

  37. Anonymous

    I have to disagree with the presumption that the numbers are being politically fiddled with. There is something strange going on – but BEA doesn’t play with the numbers. And even if they did, they wouldn’t be playing with this one – because the most important GDP number is the advanced 3rd Quarter data that is released in October right before the election. If you were to politically play with the number you would publish a low number in 2Q and a high number in 3Q (to show that things are getting better). But what happened here was that the revision went higher in 2Q. In fact, the revision might end up strengthening the Dems case – as the 3Q numbers are likely to be lower. So to believe that the numbers are being politically manipulated, you would have to believe that either the Obama folks have taken over BEA or that the Bush folks are increadibly politically inept. The Bushies may be inept in some things — but not in playing the political game.

    So I guess I have to disagree.

  38. doc holiday

    Is everyone gone here (yet)?

    I wanted to add to my mystery from 4:54, which fell apart, and continues to die on the vine, i.e, one potential reason for dropping The 30 year Treasury in 2002, was to manipulate the yield curve.

    A Simple Treasury Duration Adjustment

    There are a number of ways to re-target your portfolio duration. One way to shorten portfolio duration is by replacing
    the longer-dated cash securities with shorter-dated securities…

    While the simple 10-year T-note futures position performed well in the case of the 20 bp parallel shift, Scenario 4b shows
    that it misses the mark when the yield curve changes shape. In this case, it produces the effect of a 13.5% duration
    target reduction ($102,223.80 / $756,905.35). Obviously, a big part of the mismatch occurs because the 10-year yield
    moved only 10 bps. This might lead you to think that using the 5-year T-note futures contract would improve your results,
    however, as Exhibit 4C shows, it won’t. This $205,040 futures gain has the effect of a 27% duration target reduction
    ($205,040 / $756,905.35), which is even further off your target than the 10-year T-note futures result.

    I’m a little ahead of the curve here maybe?

  39. Juan

    For any so inclined, I’d suggest reading Ch 1 of Measuring the Wealth of Nations: The Political Economy of National Accounts, available here:

    The GDP accounting exercise fails to correctly distinquish between productive and necessary and in so doing cannot be an accurate measure of growth — the methodolgy may be internally coherent but, by conflating too much unproductive consumption with productive consumption, also falsifies and IMO increasingly so as the structure of a capitalist economy changes.

    The CFNAI suffers similar problems but has been less distorted and that Index’s 3-mos MA tells me that we’ve been in recession since last year.

  40. Anonymous

    I seem to recall most economists expected to see a revised upwards # for Q2. That the # went up because of more exports and a reduction in inventory destocking kind of exonorates the economists since these series are largely unforcastable. But most I see expected a revised upwards #.
    Bigger exports are good. Smaller inventory build-up is good and bad. But lets see what the consumer does in Q# and Q$.

  41. World Worst Stock Picker

    The government pundits throw stupid stats about the economy when outside you can see the signs of the slow economy.

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