Saturday, February 2, 2013
What is the REAL Growth Rate and What Does it Mean?
Earlier this week I commented that the negative U.S. GDP print for the fourth quarter of 2012 was not unexpected, at least by those of us who were paying attention. The media was apparently "surprised" and "stunned". Either through bias, ignorance or just a healthy optimism that is misplaced, the media has for four years put a positive spin on any and every bit of economic data that comes out. Its understandable that the Fed and the administration would want to put their best spin on poor data; the Fed because they are trying to increase confidence and the administration because there is an ever present political element to showing progress. But for those of us who are either managing wealth for others or are trying to preserve our own wealth for a sound economic future, we must look at the reality beyond the "noise" of the pundits and media so that we can make sound decisions.
Below is a graph of headline GDP growth in the US that is reported to the public starting in 2000 with an index starting at 100. It certainly gives the impression that the 2000's were a prosperous time in the US, that growth was interrupted briefly in 2008, then resumed again in late 2009. If only this were the case.
This graph is based on GDP growth and adjusted for the reported inflation, which as I have noted before here and here, is understated due to revisions in how inflation calculations have changed to reduce government costs in entitlement spending like social security.
So what would GDP growth look like if corrected for just 2% more inflation? See below:
Skeptical? Then ask yourself this based on these facts, all provided by government sources: which graph seems to explain the economic environment we are in given:
The labor participation rate is dropping.
More people are dropping out of the labor force each month than are finding jobs.
The number of people on food stamps are at record highs at 47 million.
The St. Louis Fed shows this is the worst economic recovery in history.
As I commented last Thursday, it is very likely we will go into a double dip recession (By official government statistics), but readers of this blog will see that we have, essentially, been in a recession/depression for several years now.
The High Price of Understated Inflation
The Worst Recovery in History