Thursday, January 31, 2013

GDP, Non-growth, and the Deflators (MISH)

Ten Reasons for Declining GDP Growth Over Time; Analysis of Various GDP Deflators

To compute "Real GDP" one has to adjust nominal GDP by a measure of inflation. Different measures of inflation provide different answers.

Doug Short at Advisor Perspectives has an excellent column following every GDP release showing what the reported GDP would look like with various deflators.

His latest report is Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference) 
 How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.

The Lower the Deflator, the Higher the GDP

The BEA puts the latest compounded annual percentage change in the GDP deflator (i.e., the inflation rate) at 0.60%.

Interestingly enough, the consensus forecast was for the deflator to come in at 1.6%. Had the deflator indeed come in at the consensus of 1.6%, Real GDP would have been a percent lower at -1.13%. Had the deflator indeed remained unchanged from the previous quarter, today's Q4 real GDP would be two percent lower at -2.21%.
Question of the Day

Let's stop right there and ask: Does anyone out there possibly believe price inflation is a mere .60%?

  • With the GDP deflator (the official measure), the reported GDP was -.14%
  • Using PCE (personal consumption expenditures) as a deflator, GDP would have been -.77%
  • Using CPI (the consumer price index) as a deflator, GDP would have been -1.56%
  • Using ShadowStats CPI as a deflator, GDP would have been -4.3%

Read Full Original Post and More HERE

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